In our business sector, it’s no secret that solid cash flow management practices are crucial, especially given the idiosyncratic nature of how our customers purchase and pay for building materials. Put ten successful LBM dealers in a room, and most would say that they have decent collections but would admit that lack of cash flow is holding them back from their goals of legacy planning or new growth ambitions. They would also tell you that they sometimes feel the frustration of “being the bank” for their customers with chronically late payments keeping them from what matters most.
The Impacts of Cash Flow
Before we suggest best practices for managing A/R, note that these practices are focused on your balance sheet, not necessarily your P&L. If a dealer has strong sales, yet is not paid on time for goods sold, those sales are reflected on their balance sheet as A/R, rather than as cash. Too much non-current A/R is the sign of a business whose growth potential is being limited and is potentially a vulnerable business if something happens and they need that cash.
Reasons for maintaining a healthy balance sheet reach beyond peace of mind or the need to maintain a contingency fund. If cash is not constricted, you can make vendor payments on time and keep up with maintenance and upgrades. Good cash flow also allows you to hire and retain quality staff, stock plenty of inventory, roll with dependable trucks, and invest in logistics and inventory control technology.
Here’s a comparison to highlight the impact of good cash flow. Company A, an organization with $15,000,000 annual sales, generates $1.2 million in sales in January, but collects just $1,000,000 net 30, allowing the remaining $200,000 to slide, say, 60+ days.
Interested in reading the full article? Check out: Killer Cash Flow.