Cash is a medium of exchange for goods and services. Cash provides flexibility. Cash flow equals cash receipts minus cash payments over a given period of time.

When you sell a product, you can make profit today and go bankrupt other day unless you manage cash flow efficiently. As an example, you sell a product with a good profit today. However, you accept to receive money after 60 days. If you have to make payments to your suppliers in 30 days, you will have negative cash flow after 30 days.

Brief suggestions which help to improve cash flow for manufacturing companies or constructors :

Invoicing :

•  The internal routines have to be set up in a manner minimizing the time between when an order is ready for invoicing and the actual issue and dispatch of the invoice. In practice this should mean invoicing on a daily basis.

•  Prepare shipment documentation in advance to avoid delays

•  Implement routines so that credit notes are issued promptly to avoid customers to hold payments

•  Measure and evaluate lead-time (float) between product/project "ready for packing/shipping" and invoicing

•  Establish a routine that prevents incorrect invoicing, start with follow-up reasons

•  Make sure that there are sufficient back-up personnel being able to handle invoicing.

Advances from customers :

•  For large projects it shall, without price deterioration, be negotiated for a substantial part of the order-amount to be received as advance payment.

•  Advances from customers shall be due immediately and not include any credit period.

•  Bring advance payment request to final negotiation.

•  Speed up the process of issuing invoice for down-payment as well as issuing bond /guarantee for large tenders.

Accounts Receivable :

•  An integrated part of the collection process is to continuously contact customers ten days prior invoice due date for large invoices, as well as to immediate follow up any disagreements having an influence on payments Reminders of payments due should be sent promptly and followed by a telephone call.

•  When applicable, inform the customers not to pay with check, alternatively send check 5 days prior due date.

•  Identify reasons for nonpayment related to internal issues (e.g documents), put resources to solve quickly.

•  A detailed A/R overdue report to be updated biweekly incl. customer, amount, reason, action, who, when, statistics and age analysis.

•  Check that the terms of payment stated on the invoice is in accordance with the contract.

•  Offer a bank guarantee in order to receive immediate payment, e.g. to receive retention payment for last milestone (cost).

•  Penalty interest for late payments included in all contracts.

•  A penalty clause for late payments must be included in all contracts.

•  Find extra resources to assist in overdue collection.

•  Visit customers with poor payment record.

•  Discount receivables confirmed by letter of credit (cost).

Accounts Payable :

•  Ask for ‘free delivery month’ in all supplier agreements.

•  Avoid early payments to suppliers.

•  Due date on invoices from suppliers is to be calculated from the latest date of receipt of invoice date or received goods.

•  Send back invoices from suppliers if applicable (received wrong quantity, incorrect price, etc).

•  Vendor checks are to be issued on due date, not earlier.

•  For large payments, consider same day payments (cost)

•  Consider using check payments to suppliers.

•  Frequently check that the terms of payment stated on the invoices are in accordance with the contract.

Inventories :

•  Purchases at need, disregarded minimum order quantities (cost).

•  Review optimum order quantities, order points, safety levels to minimize inventory levels of components/raw material.

•  Dispose slow/obsolete inventory items. Sell and bring in cash.

•  Dedicate responsibility for all inventories/stocks.

•  Negotiate consignation stock with suppliers having quality problems or poor delivery precision.

•  Review production process (from produce to stock to produce to order).

Projects :

•  Strive for cut-off clauses in contract, limiting the customers possibility to hold payment.

•  Optimize delivery dates.

•  Clear definitions of completion of milestones.

•  Define procedures for follow up and reporting of milestones status.

•  Individual price negotiations for purchases of all major items .

•  Calculate cost of capital in all projects.