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The first strategy that would be suggested to improve the cash flow and position of the following company includes value pricing. Pricing is an essential factor in the success of any business, as it is directly involved with the functions and efficiency of the companys cash flow. Services and products that are priced too low can diminish cash flow by creating a tighter profit margin. On the other hand, services and goods that are priced too high could result in out-pricing potential customers and creating obstacles for client engagement and sales.
While several pricing strategies exist, value-based pricing is a method that may be most beneficial for the generation of a positive cash flow within smaller businesses. Essentially, value-based pricing estimates the last price at which a customer is willing to purchase a product or service. Hence, it is a strategy that investigates a perception of value which can then be used to increase cash flow. Because value is intangible, the price of the product can be set to what the company owner perceives to be profitable and reasonable, even if it does not reflect the exact value of the good or service. This strategy requires a deep understanding of the companys client base and whether or not its services or goods are in demand. While value pricing may be more common in industries such as fashion and clothing, it can be applied to any service or product that is generating a steady demand. The selected value price must be appropriate, as pricing clients out or selling products for below their original value will result in negative cash flow. If the selected price change is adequate, clients will continue to purchase the product, but the cash flow will begin to notice an increase.
Another strategy involves the improvement of the accounts receivable through several fundamental changes to how the company receives payments. First, the company must be able to successfully maintain and track its accounts receivable. This includes having detailed knowledge of the value of the collected invoices within these accounts and of any money that is due to be paid. This may be done through accounting systems to increase efficiency and decrease time costs. Payments that have outstanding past-due notices may never make it to the companys accounts, and being aware of these issues allows a company to proceed with operations despite the setback (Sliwoski, 2018). Essentially, this method may not directly increase cash flow, but being aware of such difficulties allows a company to avoid severe decreases in cash flow.
Three strategies address clients directly in terms of cash flow improvement, and they are the creation of a secure payment option, small enticements for on-time payments, and clear and brief invoices and payment policies. Secure payment options allow clients to pay promptly as authorized payment tools require minimal effort on behalf of the customer. Clients that make early or on-time payments may garner small rewards, such as discounts on their next order or a product-related gift. The clarity in both invoices and payment policies is essential, prompts that are sent out to clients must have a succinct but understandable relaying of essential information such as due dates, amounts, and other vital details. Policies should mimic this by outlining clear terms and procedures of the company. Combined, these strategies entice the clients to make timely payments which then improve the steadiness and quality of the companys cash flow.
Reference
Sliwoski, L. J. (2018). Understanding Closely Held Company Cash Flow. Corporate Accounting and Finance, 29(3), 83-90. Web.
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