How Businesses Can Create Smoother, More Predictable Cash Flow
Cash in hand is a critical factor in the long-term survival, growth, and success of a business. The ability to maintain a healthy and more predictable cash flow is a sign of an efficiently run company. Even thriving, profitable businesses can hit a roadblock if their sales, operations, and finance activities are poorly coordinated and the cash generation is inadequate.
In simpler terms, your receivables should come in before your payables are due. A healthy cash flow results from the right mix of increased cash inflows and reduced cash outflows. Read on for some useful tips to improve the cash flow for your business. Visit the site factorfinders.com to learn more about the benefits of invoice factoring.
Increase and Speed Up Your Cash Inflows
Here are some proven ways to generate faster and more stable cash inflows:
Manage Invoicing
Send Out Invoices Right Away
Fresh sales generate almost all the cash for a business. Sending out invoices quickly is the most critical part of faster cash inflows. Consider an easy and fast software or cloud-based application to streamline your invoicing.
Speed Up Account Receivables
The key to speeding up your cash inflow is to get your customers to make payments on time. Here are some practical tips to persuade your customers to clear your invoices faster:
· Invoice Reminders
Send out emails to remind customers of their due dates. Send these reminders a few days prior to the invoice due date, on the very day it is due, and a few days after. If the invoice is still due, call them, and keep sending reminders as well. Use accounting programs that send automatic reminder emails to do this efficiently.
· Incentive for Early Payment
Devise a discount plan to attract quick payments, speeding up cash receivables. If the invoice is due 30 days after the date of issue, offer a discount on payments done within a week. Customers on the lookout for a deal will pay faster, ensuring a quicker cash inflow for your business.
· Penalty for Late Payment
Lay down a clear and strong invoicing policy. Be specific and consistent with the due dates. Put a late payment penalty if the customers do not pay by the due date. While it may not be always possible to collect the penalty, the policy will stress the need for timely payments.
· Collection of Old Account Receivables
Small businesses do not have the resources to follow up on defaulters. Hire collection agencies that pursue collection in return for a percentage. These agencies also purchase the bad debts at a discount, undertaking any subsequent risks of collection.
Optimize Pricing
Increasing prices scares most business owners. The main concern is about a drop in sales. If your business suffers from poor cash flow, you may need to reconsider the pricing policy. There is nothing wrong with wanting constant growth in sales. But it should not be at the cost of lower profits and a reduced cash flow.
Expand Sales Activity
Expanding your customer base is probably the best way to increase cash inflow. If your product or service is doing well, perhaps there is a need for new marketing tactics to expand further. There could also be scope to add new products or services.
Improve Inventory Management
A business needs inventory to earn profits. It is one of the biggest expenses in your business. Study your sales patterns and place orders accordingly. Be objective about the old inventory that does not move. The goods in your stock that face a tough time to turn over need liquidation at the earliest. It will free up cash for more important things. It could also be worth looking at the various forms of commercial finance, as a means to help free up cash, through big assets.
Book Advance Deposits
Ask for a deposit equal to half the value of custom orders. A deposit covers the risk of a loss in delivering customized orders and boosts cash inflows. Ensure clarity in the contract language to avoid confusion. Conversely, avert the need to pay deposits to vendors for such orders.
Promote Subscriptions
For your products that are resold many times over a period, set up a subscription plan. Maintenance, landscaping, and magazines are some products and services apt for a subscription program. You receive upfront cash and the advantage of booking future sales.
Use High-Interest Accounts
Most banks offer high-interest accounts that provide liquidity along with the growth of your cash. Transfer required funds to a checking account from a higher-paying account as per your business’s needs. Ask customers to pay directly into the higher-interest account so that you start earning interest immediately.
Initiate Lines of Credit
Accounts Receivable Line of Credit
The gap between cash outflows and cash inflows shows up on the company books as accounts receivable balance as assets. Most banks lend up to 80% of this balance. You can tap into this cash source instead of waiting for the invoice collections.
Inventory Line of Credit
Raw materials, intermediate products in the assembly line, and unsold inventory are all assets of your business. You can use these as collateral for loans up to half their value.
Invoice Factoring
You can sell your outstanding invoices, at a discount, to factoring companies for improving your cash flow. These companies advance cash up to 80% of the accounts receivable balance. Factoring is more expensive than accounts receivable bank loans.
Invoice Financing
As opposed to invoice factoring where you sell your invoices to a company, invoice financing is a loan. You apply for funds with your customers’ invoices as collateral. You pay back the loan once you have collected the outstanding debts.
Reduce or Delay Cash Outflows
Here are some reliable ways to control or reduce your cash outflows:
Lease Equipment
Leasing equipment, and real estate, is usually more expensive than an outright purchase. But it is a practical way to save cash outflow, especially if your business is not flush with cash-in-hand. You pay out small amounts and maintain your cash flow. You can also get a write off on your tax, as lease payments are a business expense.
Buy Used Equipment
Buying used machinery can save you more than half of the price of a new one, without compromising on quality too much. Search the local auctions and classifieds to look for any foreclosures or sales in your area.
Repair Capital Equipment
Office machinery, if maintained properly, lasts for long. It may become obsolete and still not wear out. Motor vehicles too, with adequate maintenance, can keep running for 100,000 miles or more. Save on cash outflows by increasing the replacement time of costly capital equipment with repair and maintenance.
Delay Upgrades
Software as well as hardware upgrades are a regular feature of office equipment and applications. Be sensible in purchasing or upgrading costly electronic or computer equipment. The change in the newer version may not be worth the cost of the upgrade. Look for open-source software that might work for your applications.
Defer Payments
Postpone vendor payments to the last possible date without violating the terms of sales. Set a payment cycle of up to 60 days from the date of the invoice, if the conditions in the contract permit it. Slow down the cash outflow while maintaining your credit rating as well as amicable relations with important vendors.
Negotiate with Suppliers
Negotiate for lower rates and better terms with your vendors and suppliers. Maintain friendly communication and keep in touch with them on a regular basis. Offer to make early payments in return for discounts and better deals.
Use a Bi-monthly Payroll Cycle
A bi-monthly payroll cycle brings down administrative costs of collection and tabulation of payroll data. It requires 24 payment cycles a year as compared to 26 cycles in a bi-weekly program. Deposit the wages directly into your employee’s accounts instead of writing paychecks.
Renegotiate Debt
Recent years have seen a drop in interest rates. Additionally, the federal government has launched many programs to stimulate small businesses in view of the recession. SBA (Small Business Administration) guarantees are available to expedite loans. Review existing credit terms to find out if you are eligible for a more favorable interest rate or an extension of the loan period.
Form a Cooperative
There is power in numbers that provides teeth to negotiating and bargaining. Find other similar and like-minded businesses in your field. Combine the cash resources to bargain for lower prices. Suppliers are always willing to offer bigger rebates to a consortium that buys in bulk.
Pay Electronically
You can defer paying bills until the last date, if you pay electronically. This can buy you time and improve your cash flow. Also use a business credit card as they typically offer a three-week grace period, which can help you increase the cash flow.
Takeaway
Efficient and smoothly run business operations result in a robust cash flow. The tips above can help you increase your cash inflows and keep the cash outflows under check.
Along with these, you also need to ensure you are taking the right steps in marketing, product development, and customer service. All these need to synchronize and come together at once, to ensure a well-rounded growth for your business.
Growth of all the parameters like revenue, profit, and cash flow is the sign of a successful business. It is important to review and adjust your business plan regularly for you to anticipate trends and avoid pitfalls before they affect your business.
