Aug 30, 2019

Ways to Open the Tap for Better Cash Flow

Alyzabeth Smith, CPABy Alyzabeth R. Smith, CPA

MoneyLife100Of the many financial instruments that exist, cash is one of the simplest forms. Value is easily measured and risk is generally limited to custody, inflation, and deflation. Many established companies keep sizeable cash reserves on hand in order to pivot easily when expansion opportunities arise. Not all businesses are liquid enough to stockpile cash for casual investment, but there are things they can do to raise or keep cash in a pinch.

Make Sure the Price is Right

Businesses should periodically review their price listing to determine if the cost of goods and services reflect the value being received by the consumer. Many elements of the consumer experience are psychological, and sometimes discounts can be a disservice. Low prices are consumer-friendly, but many people have internalized the old adage “You get what you pay for.” Underpriced items can be perceived as cheap in all senses of the word. While price gouging should be avoided, a weak pricing model can affect credibility.

Money flowing through a faucetOnce prices have been set, a company should confirm that it has a solid collection procedure. This process should incentivize advance payments, encourage timely payments, and penalize late payments. This is a sound financial practice that helps remove impediments to cash flow and adds legitimacy to new businesses that have not yet established themselves as credible competitors. If pricing models have been reviewed and the company is still short on cash, there are other options to pursue.

Cash While You Wait

Accounts receivable financing is a way to get cash advances on current accounts receivable. This option is especially useful for companies that may have difficulty qualifying for an ordinary business loan. The financing is closely associated with the health of your accounts receivables (time outstanding, amount, and reliability of your customers) as opposed to being solely determined by a business’s creditworthiness. Other criteria may be considered, but generous weight is given to the quality of your accounts receivable balances.

Advance financing must be repaid, even if the invoices are never settled by your customers. The funding received is essentially a prepayment of invoices by a financial institution. If you never collect on your invoices, you still owe the bank for the advance you received. With accounts receivable financing, you do not relinquish ownership of the outstanding collections.

The X Factor

Similar to accounts receivable financing, factoring arrangements can be used to increase short-term cash flow. While the structure of accounts receivable financing more closely resembles a traditional loan, the factoring of accounts receivable generally involves a third-party financial institution purchasing your unsettled invoices. Through a factoring arrangement, instead of you having to chase down invoice payments the responsibility for collection on the invoices generally transfers to the factoring agency. This is a big plus for small businesses that may not have the manpower to continually remind customers to pay up. However, in situations where small enterprises do keep title to their receivables and need to stay on top of their customers for payment, there are agencies that can provide assistance.

Ask for Help

When you have little hope that an invoice will be paid and even less desire to repeat business with a customer, a collection agency may be your best chance at recovery. Some agencies structure their agreements to keep a percentage of the amount recuperated, while others may be willing to buy the delinquent receivables. When the alternative is no recovery at all, pennies on the dollar may be a favorable option, particularly when large dollar amounts are involved. In a debt sale, the collection agency would keep any recovered proceeds after paying you the agreed upon purchase price.

A little reconnaissance is always a good idea when selecting a collection agency to represent you. The Federal Trade Commission imposes sanctions on those who violate the Fair Debt Collection Practices Act, which regulates the conduct of debt collection agencies. These agencies must also abide by applicable state regulations. If representatives of an agency you employ lie, threaten, or otherwise misrepresent a debt, they are doing so as your agent. Their unprincipled conduct will be associated with you in public perception. A principled collection agency provides companies with a viable opportunity to enhance cash flow.

Cash Flow Optimization

Cost management plays an important role in helping businesses retain the cash they’ve earned. Taking advantage of discounts for bulk purchases and reducing the frequency of administrative tasks such as payroll can help companies reduce the frequency of outflows. Established relationships with vendors may also offer opportunities to reconstruct contracts with more favorable payment terms. When combined with appropriate cash inflow mechanisms, the strategic timing of outflow payments can help a company employ a robust system of cash management.

Alyzabeth R. Smith, CPA, is a senior associate with Siegfried Advisory in Wilmington, Del. She is a member of PICPA Council and chair of the CPA Image Enhancement Committee. She can be reached at alyzabeth_smith@msn.com.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.