Liquidity problems can rob anyone of sleep. Whenever we get calls from business owners asking us for help, they most often are concerned about cash flow. They may describe it in different terms – expenses are up, margins are off, clients are not paying on time – but in the end, what they're talking about is not having enough cash to cover expenses. Cash flow problems can strike anyone. Even if your business is growing at a rampant pace, you can’t afford to let your guard down.
In this article, we’ll run through the various ways you can improve your cash flow in three key areas: receivables, liabilities and inventory management. Most businesses need a mix of strategies to keep their finances healthy.
The fundamental gap between when you invoice and when you get paid can make or break any business, and most companies simply cannot afford to wait for money they are owed without a significant impact on their cash flow. Getting customers to pay on time is crucial. Here’s how you do it.
Systemize your invoicing
Systemizing your invoicing processes is the easiest way to stay on top of payments. Ideally, you’ll send a reminder just before the due date, the day the invoice is due, a few days after, and then at intervals during the late-pay period. Virtually all accounting programs have payment reminders built in to automatically chase late-paying customers.
Incentivize early payment
The sooner you receive your cash the better, so think about offering a cash discount to encourage your customers to pay early. For example, if your terms are usually Net-30, you could offer a 2% reduction if the invoice is paid within 7 days.
Punish late payment
Conversely, you can opt to charge a late-payment penalty for customers who exceed the due date. Include this in your contract terms at the start of the relationship, and again on the face of your invoice, so customers can clearly see what their payment obligations are. Introducing these stricter payment policies often means you get paid before other suppliers do.
Get personal
Business owners and leaders are often reluctant to get involved on the front line of collecting debt but tackling the issue head on can yield big rewards. Talking to customers allows you to understand what the real problem is. If the late payment is due to problems with your product’s quality or if there’s something else going on at the client end, then you can help them resolve it. When handled well, negotiating a payment solution can consolidate the customer goodwill that you have painstakingly built up over the years.
Consider invoice factoring
With invoice factoring, you sell your unpaid invoices to a financial provider in exchange for a percentage of the invoice’s value as immediate cash – around 90% advance rates are typical. Factoring is a fairly aggressive step but can be a lifesaver if a customer stops responding and you need the cash right away.
Getting the cash you’re owed is one way to navigate through a cashflow crisis. At the same time, taking proactive steps to reduce your costs may help you breathe much easier.
Reduce operating expenses
Costs that are built up in good times can easily become a noose around your neck in stormy times. That’s why it’s important to keep all your costs under close control. Ask yourself:
Pay bills with a business credit card
If you pay bills with a credit card, you can spread the expense over a longer period which can do a lot to increase your cash flow. You could even get cash back with a business rewards card. As long as you use the card wisely and can afford to make regular payments each month, a business credit card is an easy way to manage cash flow.
Negotiate discounts with suppliers
Review your vendor's contracts regularly to look for:
Don’t be afraid to approach your vendors and ask if you can optimize pricing and payment terms together. You can also shop around and get quotes from various suppliers – there's usually competition for your business.
Check your systems
At Ventura, we spend a lot of time setting up accounting systems to ensure that good payment controls are in place. We want to make sure that your vendors aren't paid early, paid twice or overpaid. Accounting software will do some of the heavy lifting for you, but it’s worth conducting a manual risk assessment to make sure that your payment systems are in order. Ask yourself:
Some business sectors, like retail, tend to have most of their assets tied up in inventory. Turning inventory as quickly as possible at the best possible margins is the name of the game, but inventory has a funny way of running away from you. New product categories, broader assortments, greater stock depth – there’s always something to buy. So, if cash is tight and you're wondering where the money’s gone, look at your inventory.
Cashflows can be impacted by excessive capital spending in general so even if you don’t carry a lot of inventory, it’s worth looking at your capital spending projects that may have drained the cash.
Audit your holdings
As accountants, we need to classify inventory as an asset. But holding it can be costly. Excess inventory can push up storage costs and there’s a risk that your items will become obsolete before you use or sell them. If your goods are perishable, then you will definitely want to get them on the market as soon as possible.
The starting point then, is to carefully consider which products sell well and which you have a hard time turning over. Look at your sales patterns to see when your busy and non-busy sales times are and order inventory accordingly, closer to the time you need the stock.
Get rid of dead inventory
All inventory has a life cycle during which demand will peak, then fall. Whether it's seasonal merchandise collecting dust in the warehouse or date codes on industrial components, the market value will drop considerably as the item ebbs. Holding dead or dying inventory ties up cash that’s desperately needed elsewhere in the business.
Dead inventory needs liquidating as quickly as possible and ideally, you’ll have a markdown budget to manage this. In the retail business, for instance, inventory is all about batting averages. Planned well, you can usually afford to mark down a percentage of your inventory investment and still realize a profit. In a cash flow crisis, any money coming in is better than no money.
Lease, don’t buy
If you don’t have the cash to flat-out buy equipment or you’ve invested in assets that have not pulled their weight before, it might be time to consider equipment leasing. With leasing, you lose the advantage of having the equipment as a fixed asset for your business, but you get to spread the expense over many months, which helps improve cash flow. Even better: lease payments are a business expense that you can write off on your taxes.
Cash is the lifeblood of any business — don’t wait until you’re down to your last dollar to start looking after it. Every company should have a number of techniques on hand to deal with the inevitable cash flow challenges that arise. Cash flow management is not a one-time fix, but an ongoing discipline. Get it right, and cash flow can become a great strategic tool; the engine that drives the growth of your business.