Cash flow problems rarely begin with a single event.
More often, they develop quietly. A few customers begin paying a little later than usual. Inventory starts moving more slowly. Expenses creep upward while sales level off. Before long, management realizes there isn’t quite enough cash available to comfortably meet payroll, pay suppliers, or invest in new opportunities.
Ironically, it’s often the decisions companies make during a cash flow crunch that determine whether the situation improves or becomes significantly worse.
Here are seven common mistakes to avoid.
1. Waiting Too Long to Take Action
One of the biggest mistakes that management makes is hoping the problem will simply work itself out.
- “We’ll catch up next month.”
- “Our biggest and best customer always pays eventually.”
- “Sales will improve next quarter.”
Sometimes those things happen. More often, valuable weeks, or even months, may be lost before meaningful action is taken.
Obviously, cash flow issues are usually much easier to correct in their early stages than after they have become a full-scale crisis.
2. Treating Every Supplier the Same
When cash is tight, some companies simply stop paying everyone. Or, at a minimum, start paying all vendors under an installment plan. Unfortunately, that across-the-board approach doesn’t always work effectively.
Instead, evaluate each supplier individually. Which vendors are critical to keeping production moving? Which suppliers have supported your business for years? Which ones are likely to work with you if you communicate honestly and proactively?
Many suppliers are willing to extend payment terms when they understand the situation and see a realistic plan for repayment. Silence, however, is often interpreted as avoidance.
3. Delaying Customer Invoicing
It sounds obvious, but many companies unintentionally delay getting invoices out the door.
Perhaps they’re waiting for supporting documentation. Maybe someone is traveling and needs to approve the billing. Or perhaps invoicing is simply pushed aside while other priorities take over.
Every day an invoice sits on someone’s desk is another day before the payment process even begins.
Invoice promptly and electronically whenever possible. The sooner the invoice reaches your customer’s accounts payable department, the sooner the payment clock starts ticking.
4. Ignoring Small Past-Due Accounts
When cash is tight, companies naturally focus on collecting their largest receivables. Unfortunately, in pursuit of the big whale accounts, smaller balances may often get ignored.
Those smaller invoices may not seem significant individually, but together they can represent thousands, or even tens of thousands of dollars, sitting unnecessarily in accounts receivable.
Every overdue invoice deserves attention especially since cash flow improves one payment at a time.
5. Failing to Ask Good Customers for Help
Your best customers can sometimes become your greatest allies. If you have customers who consistently pay within 30 to 45 days, consider offering a modest early-payment discount in exchange for payment within 10 days.
Others may simply be willing to accelerate payment if you explain that doing so would be appreciated.
Not every customer will agree, but many long-term business relationships are built on mutual cooperation. Sometimes all you have to do is ask.
6. Cutting Costs Without a Strategy
When companies experience financial pressure, the first instinct is often to cut expenses across the board.
While reducing unnecessary spending makes good business sense, indiscriminate cost-cutting can create new problems.
Eliminating customer service staff, reducing collection efforts, postponing equipment maintenance, or cutting sales activity may improve cash flow temporarily while hurting long-term performance.
Instead, identify expenses that are excessive, redundant, or no longer provide meaningful value and focus your efforts there.
7. Treating Collections as Tomorrow’s Problem
Perhaps the most expensive mistake of all is allowing receivables to age because “we’ll deal with them later.” Unfortunately, invoices rarely become easier to collect with time.
Customers change personnel. Financial conditions deteriorate. Disputes become more difficult to resolve. Documentation becomes harder to locate.
Companies that monitor aging reports daily, communicate with customers promptly, and address payment issues early generally experience healthier cash flow than those that wait until accounts become seriously delinquent.
8. Not Expanding Sales Opportunities with Existing Customers
Some very good customers may feel restricted by your credit limits and terms. Reviewing credit terms on individual customers and increasing limits accordingly may actually encourage those customers to purchase more. More business usually translates into more profits and ultimately more cash.
Final Thoughts
Every business experiences periods when cash flow becomes tighter than expected. The difference is not whether challenges arise but how its management responds.
Companies that communicate openly with suppliers, invoice promptly, actively manage receivables, and make thoughtful financial and credit decisions often emerge from temporary cash flow difficulties stronger than before.
Your thoughts and comments (nseiverd@cmiweb.com) are most welcome!
Nancy Seiverd, President
CMI Credit Mediators, Inc.
All Rights Reserved
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