Angela Hausman, PhD March 30, 2021 No matter how successful your business is, regular cash flow is critical to your long-term operations. When incoming funds don’t match outgoing funds, things get pretty chaotic. Do it frequently enough and you lose suppliers and employees who decide your business isn’t where their future lies. Recognize that more businesses close their doors due to poor cash flow than poor sales.
Anything can contribute to poor cash flow, including disrupted or delayed accounts receivable and slow receipt of your orders, resulting in lost sales to customers. Make no mistake, cash flow problems can inhibit your productivity resulting in lost profits and potential failure. To combat this, you must ensure your cash flow remains regular, reliable, and predictable. If you want to improve your company’s cash flow, take a look at these top tips now:
Improve your business’s cash flow
Incentivize customers to pay early
When clients pay invoices on time, or even early, it keeps your cash flow buoyant and helps to ensure you have adequate funds at your disposal. Furthermore, it means you don’t have to waste resources chasing down payments from delinquent customers. Thus, incentivizing customers to pay on time or early by offering them a discount is a cost-effective way to maintain sufficient cash flow.
Commonly, businesses offer other businesses a 2% discount for paying their invoices within 10 days and require the full payment within 30 days, regardless. Many businesses take advantage of this small discount as a means to reduce their own expenses and improve their cash flow. When you can avoid unnecessary costs and receive income more quickly, it provides your business the financial predictability it needs to thrive and provides the necessary funds needed to build or buy new items to sell.
Run credit checks
It’s a common business practice to sell products to other businesses before the customer pays for them, as discussed above. We call this a business line of credit. However, before you take this kind of risk, it’s vital to confirm that the business has a good credit history. A number of companies offer business credit scores for a small fee. Among these are some of the big consumer credit monitoring companies like Experian plus businesses that specialize in monitoring business credit histories.
If a company routinely defaults on its debts or pays late, for example, you probably shouldn’t offer them a line of credit. If a business doesn’t have a credit history or their credit history isn’t adequate, considering offering them the option to prepay for products for a short period of time before extending them a line of credit.
By the same token, you want to ensure you maintain an adequate credit rating yourself. Otherwise, you’ll find you are overextended and face cash flow problems because you have to prepay for the products you purchase.
Use a BPO company
A BPO company, or business process outsourcing company provides access to expertise that you don’t have in-house. Whether you’re trying to resolve an on-going payment dispute, or you want to implement more efficient collections, a reputable BPO company provides the specialist support you need. By outsourcing your requirements, you avoid the need to create additional in-house departments, which reduces your costs by a significant amount. Furthermore, you can access the professional support you need straight away, without having to hire and train extra in-house staff.
Factoring
Factoring is the term given to the process of selling your accounts receivable to a third party. Factoring gives you ready access to the money you’re owed by customers so that it improves your cash flow situation. There are any number of financial institutions including banks and specialized accounts receivable firms who offer factoring by taking a percentage of the accounts receivable. However, if you have accounts receivable from businesses with a low credit score you will find yourself unable to secure factoring.
The cost you pay to factor your accounts receivable is a function of factors such as:
- the industry you’re in
- the cash value of the account receivable you wish to factor
- the creditworthiness of the business that owes you money
- the number of days outstanding in the receivable
Reduce your inventory
If you have a large inventory, you tying up your funds for an extended period of time and paying for additional storage space. By reducing your inventory, you can increase your cash assets improve your cash flow. The less inventory you have, the lower your potential loss from theft, damage, or obsolescence. If you find yourself with too much inventory, consider offering deep discounts to customers to get rid of the inventory or finding secondary businesses, such as those selling on discount sites or flea markets, as an option to get rid of old inventory. Warehouse space in the associated cost involved and packing and packing from your warehouse may be costing your business more than is necessary. Use effective management practices in your warehouse to reduce the amount of space needed and improve the speed with which you can pick and pack from the warehouse. Logistics innovations, such as RFID, help improve the management of your warehouse, making it more efficient and reducing space demands.
Introduce new payment methods
If you want to enjoy improved cash flow, ensure it’s easy for customers to pay their invoices. Introducing new payment methods ensures that customers can use a transaction portal that’s most convenient for them. From electronic transfers, like PayPal or Bitcoin, to online credit card and debit card payments, there are a variety of payment methods you can use.
For large purchases, consider partnering with a financial institution to offer financing options. Not only does this improve cash flow by getting your money upfront when customers make a purchase, but you’ll find sales increase because you offer easy financial terms to prospective buyers.
Make cash flow a top priority
Without a regular cash flow, you’ll find it difficult to keep up with your own bills, which could affect your company’s credit rating and, ultimately make your business less efficient as you lose your best employees and suppliers to companies able to meet their financial obligations. If your operations or growth plans are disrupted due to cash flow problems, it could have a devastating effect on your performance. By making cash flow a top priority, however, you ensure your company is always solvent and able to capitalize on the demand for products and services.
Business & Finance Articles on Business 2 Community(42)
