3 Ways To Improve Cash flow November 4th, 2012
“Turnover is Vanity, Profit is Sanity but Cash is King”
Cash flow is the most important part of a business or put another way – if you can’t control your cash flow, you’ve had it! If you can’t pay your suppliers, or if everything falls to pieces if an unexpected bill lands on your doorstep then you’re cash flow is definitely not under control.
In theory cash flows in from sales; and then hopefully not as much flows out again to pay for staff, for stock, for energy, the taxman and any other costs associated with your business. Obviously though a variety of things can upset this balance – from a decline in sales to unexpectedly having to replace essential equipment – which can then leave your business struggling to meet payments.
Balancing your cash flow is an art in itself!
Clearly having a grip on cash flow is vital. As your business expands it becomes even more important. There are numerous systems and templates available to help you forecast your cash flow and to enable you to anticipate peaks and troughs in revenue and therefore to plan ahead.
How can you improve your cash flow if your forecast identifies potential problems ahead? Here are three methods I have used:
1. Challenge Payment Terms:
Make sure you discuss payment terms when you are doing the deal. This applies to both suppliers and customers. Have confidence – your customers obviously want your product/service and you have agreed a price but you don’t necessarily have to agree to their 90 day payment terms! Being paid more quickly will make a huge difference to your cash flow and will probably be a mere drop in the ocean to bigger companies.
Likewise with suppliers, particularly if you are a regular customer and they know they are going to get paid, you have every right to try and negotiate longer payment terms?Negotiation is clearly not an option with energy suppliers or the taxman but in this case spreading payments may be a useful tool to improve your cash flow.
Often seen as a last resort, factoring can actually be cost effective and very useful when setting up a business – and it certainly improves your cash flow very quickly. Factoring can seem confusing, but really it is very simple. A factoring company will pay 80-90% of the value of an invoice into your bank account (usually within 24hours), they then collect the payment from your customer and pay you the remainder (minus any pre-agreed fees).
Clearly the main benefit of factoring is improved cash flow but there are also other benefits:
- the factoring company take over your credit control which will either free up your time if you were doing it or save you money if you were employing staff to do this;
- you may be able to offer better credit terms to your customers thereby potentially winning more business;
- it could improve your credit rating
- it could save you the cost of borrowing money to cover short-term debt.
There is obviously a cost to factoring and you must make sure that the company you use is reputable and the fees involved are clear beforehand.
3. Offer a discount in exchange for better payment terms:
Again this works with both suppliers and customers. Clearly you need to be careful that the discounts you offer to customers in return for speedier payment aren’t so great that they negate the cost saving gained by better cash flow, but used with caution they are a useful tool. If your customers are paying you in 30 days rather than 90, the cost of a 5% discount might be a lot lower than an unauthorised overdraft charge. Likewise your suppliers might give you a generous discount if you pay them more quickly too!
In the hard world of business if you don’t ask, you don’t get – so negotiate, negotiate, negotiate! You’ve got nothing to lose by asking for a discount for prompt payment or requesting that your new customer pays you more quickly. Have confidence in the product or service you deliver and know the options available out there to improve your cash flow.
There are just three ideas – what methods do you use to improve your cash flow?
This entry was posted on Sunday, November 4th, 2012 at 1:16 am and is filed under - Business Planning, - Business Success, - Growing a Business, - Starting Out, Mums in Business. You can follow any responses to this entry through the RSS 2.0 feed.You can leave a response, or trackback from your own site.