3 Low Cost Sources of Cash – Part 2

In Part 1 of this series called 3 Low Cost Sources of Cash – Part 1 I mentioned the stress, strain, and anxiety of not having sufficient cash and the resulting game that must be played juggling creditors and even employees to survive?  In Part 2 of this series I will discuss another commonly overlooked source of internal financing.

As previously mentioned, the economic downturn that began in 2007 and accelerated in 2008 left many companies (particularly small businesses) struggling for adequate financing as lenders tightened lending requirements.  As a reminder, in an earlier blog called The Big 4 Capital Users, I used the acronym CRIP to represent 4 activities that heavily impact cash.  Specifically they are:

C –  Capital Equipment.  (Fixed Assets and their financing)

R –  Receivables (Accounts Receivable along with Credit and Sales Policies)

I –   Inventory (Controls, purchasing policies and procedures, and levels carried)

P –  People (Human resources, employment practices, training, turnover, etc.)

In Part 1 we discussed inventory and how properly managing the levels carried presented a great opportunity for your company to self-finance.  Now let’s take a look at an area that seems to present about as much conflict as any in a company.  This conflict is because so many areas of a company are impacted and areas such as sales and accounting are seemingly put in opposition to each other.  For now, I will mostly ignore the conflict as that really is a matter for top management to handle in consultation with all parties involved, thus making it clear how an appropriate balance is obtained and what the guidelines are.  So, what is this area that causes so many conflicts within a company and yet represents another strong source of internal financing?  It is Receivables (specifically Accounts Receivable).  Let’s begin this with a little story from a prior company where I worked that no longer is in business.  I think at the end you will see why they are no longer operating.

A number of years ago I was hired to be the CFO for a small company with multiple warehouses.  This company sold products to the apartment industry and provided services to install the products.  Soon after joining the company it became apparent that they had badly mismanaged their accounts receivables.  In fact, they had done such a poor job that many customers were not just 30, 60, or even 90 days past due; some were actually over a year past due.  And, here is the kicker – sales were still being made to these same customers.  There was one such customer in particular for which product was sold and installed at multiple locations.  In an attempt to collect, a salesperson was sent to visit one of the properties the customer owned.  Unfortunately, this turned out not to be possible as this particular apartment complex had been torn down.  The company had waited so long to collect that it was no longer even possible to place a lien on the property.

So, here are the lessons:

  • Stay in continuous communication with customers.
  • If a customer’s account becomes past due, set in motion a plan to collect.
  • Be willing to stop selling to a customer who refuses or is unwilling to bring the amount they owe to a current status or something acceptable.  In some industries, 45, 60, or even 90 days may be acceptable, but know what is and adhere to the guidelines.
  • Have internal policies for accounts receivable and communicate them to all impacted personnel, such as sales, customer service, and accounting.
  • If you are not already doing so, consider paying sales commissions only on collected sales.  I know of nothing more powerful in getting sales people to focus on service after the sale to be sure amounts owed are collected.  This also dissuades sales employees from continuing to go after easy sales with existing customers who are really buying because they never have to pay.  As a result, sales efforts get directed toward developing relationships with more solid customers.
  • Always remember that a bad debt is worse than not having made the sale because you are not only out the sales amount, you have also lost the inventory, labor, and any other costs associated with the sale.

Now I’m sure there are other lessons I could mention, but let’s just take a look at how this impacts the cash position of a company.  To do so, consider a hypothetical situation that is very much reality at many companies.


Accounts receivable Balances

Current 30 Days 60 Days 90 Days 120 Days > 120 Days
1,000,000 500.000 300,000 200,000 100,000 50.000


In this example, assume the company is doing $1 Million in sales per month and assume the collection pattern has been the same for each month.  So, in the above, the receivable balances are comprised of the following:

Current Month’s Sales $500,000
Last Month’s Sales $300.000
Sales 2 Months Ago $200,000
Sales from 3 Months Ago $100,000
Sales from 4 Months Ago $  50,000


If policies and procedures are implemented that prevent customers from gettin past 90 days, that will add $150,000 to the cash balance, but the reality is the impact will likely be even greater for at least two reasons.  One, the balances in the 60 and 90 day columns will likely decrease as well.  Two, the example given is looking at a company in business for only 5 months. If this company had been operating for an extended period of time without solid “sales and collection” polices and procedures, the amounts in the past due columns would likely be even worse than the example.  This is because the same customers that are in the past due amounts will continue to add to the past due columns over time if they see that there is no need to pay on time in order to continue purchasing.

One thing you can do is to offer discounts for early payment.  I also encourage you to consider using the 80/20 rule in addressing accounts receivable.  You will likely find that close to 80% of your collection problems come from 20% of your customers.  If you find as a result of improved polices and procedure that you have to stop selling to half of that 20% of the problem customers and the other half start paying faster you are now ahead of the game for two reasons – you are getting your cash faster and the effort that had been exerted to sell to the customers you have dropped can be diverted to obtaining new customers who pay in a timely manner.  Oh, and don’t forget the reduced tension between sales and accounting.  After a short while you can have both these areas on the same side.

If you would like some help getting your receivable under control, please do not hesitate to contacts us at Contact – AimCFO.

As always, your feedback is welcomed.


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