Customer invoices are the life blood of your company’s cash flow. How you process invoices and how soon customers pay them determines how smoothly you convert services into cash, and how fast your business will grow.
The following is a fictional example of what happens to one invoice when a company does everything right. It illustrates how tactics like managing a cash flow budget, negotiating payment terms and handling collections can effectively turn a receivable into a customer payment. In short, this illustrates how a cash conversion cycle should work:
Step 1 - New Business
ABC Manufacturing Corp. needs your company to build and ship 10,000 widgets and will pay $20,000 for the work.
Step 2 - Calculating Cost
This is a big order for your business. You calculate it will cost your company $15,000 to make and transport the widgets, as well as pay your staff overtime to complete the work. The project should net your company a $5,000 profit.
Step 3 - Checking Cash Flow
Before committing to ABC Manufacturing, you consult your cash flow budget to make sure you have enough money on hand to do the work. You have $45,000 in cash, which should cover the job as well as fund your company during the period while you await payment.
Step 4 - Knowing the Customer
After checking ABC Manufacturer’s credit information, you see the company has a history of paying two weeks late. You need to receive $20,000 from the company within 30 days or your cash flow will take a hit. You successfully negotiate a 15-day payment term with your new client.
Step 5 - Finishing the Job
You produce the widgets and deliver them on time. The cost comes in below budget at $14,500.
Step 6 - Invoicing
You send your $20,000 invoice to ABC Manufacturing the same day the widgets arrive at their warehouse.
Step 7 - Emails and Phone Calls
As expected, 15 days pass with no payment from your client. On the 15th day, you send an e-mail reminding ABC Manufacturing of the unpaid invoice. You follow up with a phone call three days later.
Step 8 - Payment
Payment arrives from ABC Manufacturing 20 days after the widgets were delivered. Congratulations! You were able to shave 10 days from the traditional 30-day payment period. You can put that money to work on growing your company right away.