March is a great month to focus on supplier terms, stock and customer credit to ensure you're getting the best results for cash flow.
Review supplier terms
Paying suppliers impacts your cash flow, but you can free up cash flow by negotiating extended payment terms.
If you make full use of your terms of trade with your suppliers – and wait the 30 days allowed to pay after delivery – it's effectively an interest-free loan.
How to review supplier terms
- Review all terms offered by your suppliers.
- Make a list of suppliers who require payment in less than 30 days.
- Approach each of these suppliers and negotiate payment terms longer than currently offered.
- Look for new suppliers who provide extended payment terms.
- your business's financial policies and procedures are clear about how to choose and –manage suppliers
- payment terms specify that terms commence from complete delivery – as opposed to part delivery – this should include goods or services that haven't been provided as agreed
- you can extend payment terms – lengthening the payment terms from 30 to 45 days may help smooth out fluctuations in cash flow
- quarterly payments are available – some larger companies, such as utilities may accept quarterly payments, which can help in forecasting cash flow requirements
- there's an alternative supplier that can provide better terms, but first discuss this with your existing supplier – they might match the offer and will appreciate the loyalty you've shown.
Review all stock held
Make sure you're not tying cash up by holding unnecessary stock – it costs between 10-30 percent of the value of stock just to maintain it. The costs come from storage, insurance, keeping accurate tracking records and proper controls to avoid theft.
How to review all stock held
- List all stock held, and the value of stock on hand.
- Review sales of each stock item to identify fast moving and highest-selling stock.
- List slow-moving, aged and excess stock/
- Update stock records and make a buying policy.
You can manage your stock by:
- identifying which items move quickly, which items contribute the highest gross margin, and which ones are seasonal – this will help you know how much of each line of stock to keep on hand, and when reorder is required.
- selling aged and excess stock at prices to move it, or use as a donation – this will generate cash to invest in new stock that will move quickly and free up display space; don't forget to advertise you made the donation
- negotiating with suppliers for delivery of fast-moving stock when required, called Just In Time – this eliminates the need to hold a large store of stock to meet customer demand
- maintaining good records and control over your stock holdings to ensure you keep aged and excess stocks to a minimum and reduces the risk of theft – it also makes sure you have adequate stock to meet customer needs.
Set up customer credit controls
Having good customer credit controls in place will increase your chances of getting paid on time.
How to set up customer credit controls
- Record the results of customer credit checks.
- Rank all customers according to credit risk.
- Set credit limits for each customer.
To better manage customer credit:
- engage a specialist company such as Equifax or Dun & Bradstreet to assist in checking the credit history of a potential customer
- make sure your system tracks outstanding credit of your customers and notifies relevant staff if the limit's been exceeded – ensure this notification happens before the next sale
- document procedures to be undertaken when a credit limit is exceeded, and ensure all relevant staff are aware of what needs to be done.