Precise Cash Flow Management – Best Practices

Improving your cash position brings opportunities and reduces business risk.

In the absence of equity and debt financing, alternative cash-flow management strategies can make a positive difference.  These ideas will not apply to ALL businesses but perhaps there are some you can implement. 

 

1. Get Better Vendor Payment Terms

Vendors are partners and are invested in your success. Payment terms should be reviewed from time to time since delaying payment obligations may make a big difference. At least you can ask, and if the request is declined you are in no worse a position. A business which presents its case in an intelligent way showing that the business remains viable has a better chance of a favorable reply from vendors. Some additional commitment on your part (e.g. an undertaking to buy more) may increase your chances.

 

2. Sell Future Revenue

Businesses with a strong transaction history may succeed with this. For example, a retailer which can accurately predict future sales may convince a lender to extend a loan which is repayable as future revenue is received. Of course, there are costs and your margins need to be able to support the cost of the financing.

 

3. Get Paid Faster

This will partly depend on your relationships with customers… and how much leverage you have. You can propose ideas to your customers such as offering a discount (or other benefits such as free delivery) for early payment. You can also simply mandate different payment terms at the risk of alienating certain customers, who may prefer the payment options of your competitors. Many businesses can improve collections processes because failure to follow up on Accounts Receivable allows customers to pay late without penalty.

 

4. Don’t take on (or postpone) jobs

On the one hand, making more sales seems like a good way to get through a cash crunch. Additional revenue has to be a good thing, right? Yes, but it all depends on cash flow. For example, to fulfill a client order you may have to invest heavily in people and materials while getting paid months or even years later. If you cannot change these cash flow dynamics, you may be better placed NOT taking on the work or at least trying to postpone the work until a time the business is more secure.

 

5. Reduce or Delay Expenses

In the very fluid world of supply and demand, there may be ways to reduce costs to secure the same (or similar) goods or services. This is a matter of procurement practices which should enable you to constantly evaluate options and act accordingly. Sometimes bad habits creep in such as replenishing supplies long before existing inventory has run out. At the same time, consider quality control because there are risks of not maintaining the standards that your customers have become used to.

 

6. Try Purchase Order Financing

Financing companies may be willing to pay your vendors so you can acquire goods necessary to fulfill a purchase order. You’ll need to present a clear business case especially to explain future cash flow related to that order.

 

7. Revisit Payment Terms

We’ve already referred to getting paid earlier but recognize this won’t work in some businesses. Another option is to insist on a deposit and/or milestone payments, often due once certain deliverables have been met. Again, customers are invested in seeing you succeed (and ensuring you deliver quality, on-time products) so it is worth exploring all of these options.

 

8. Sell or Lease Extra Equipment

Businesses can accumulate assets which are no longer needed or not fully deployed. These can be sold or leased. Even if they are still partially used, cash flow may be improved by selling the asset and then leasing on an as-needed basis. Assets that occupy space may reduce rental costs after their disposal.

 

9. Consider Invoice Financing

You can avoid waiting 15, 30, or 60 days for payments by engaging with a factoring company. You need to ensure you can afford these financing costs and choose the factoring partner carefully.

10. Raise Prices

Think carefully about what a price increase of 2%, 5% or 10% would do in your business. Perhaps it would have no effect whatsoever? Perhaps you’d lose many customers and fail to attract new customers because your market is price sensitive? Price elasticity needs to be understood because a price increase will increase margins and can have a positive impact on cash flow.

Finally…

Perhaps one or two ideas above can be implemented in your business? The impact of a small change can be significant whether you are on a growth trajectory or fighting for survival.  Give us a call today to get started — 559.924.1225!