April 30, 2014
The difference between a profitable business and a nonprofitable one can lie in the little things.
Here are 10 areas that you should consider looking into to see if you can improve them. You might be surprised at how a few changes can impact your profitability.
1. Eliminate unnecessary payments. Defer new expenditures until you are sure they will have a favorable impact on profitability. Look for ways to reduce operating costs. For example, switching from a weekly payroll to a biweekly payroll will cut processing costs in half.
2. Limit the amount of cash tied up in inventory. Your suppliers may offer lower pricing for volume purchases. However, you need to balance the benefit of volume discounts against the cost of keeping cash tied up in slow-moving inventory.
3. Always pay bills on time. But never pay bills before they’re due, unless the supplier offers a discount for early payment.
4. Negotiate better payment terms. Ask for 60- or 90-day payment terms, rather than the standard 30 days. Longer payment terms are essentially an interest-free loan from the supplier. Talk to your bank about consolidating debts to reduce interest costs or eliminate prepayment penalties.
5. Improve your fulfillment practices. Make sure orders are filled accurately and completely. Use the quickest means of delivery to shorten the number of days between receipt of the order and receipt of the customer’s cash payment.
6. Review and improve your credit practices. Before accepting a new customer, review available credit reports. Always get at least three trade references and a bank reference. Do not extend credit until you are comfortable with the customer’s ability to pay.
7. Review and improve billing procedures. The sooner you send the bill, the sooner you will be paid. Whenever possible, send the invoice with the order. Make sure all invoices are accurate and include a payment due date.
8. Offer early payment discounts. Many customers will take advantage of a 1 or 2 percent discount for early payment.
9. Deposit payments promptly. Consider using a lockbox to get customer payments into your interest-earning account as quickly as possible.
10. Be aggressive with past-due accounts. Have someone phone the customer as soon as the bill becomes past due. Get a payment commitment from the customer and follow up on it. If necessary, refer the account to an attorney or collection agency.
This article was originally posted on April 30, 2014 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at email@example.com.