Cash is the number one limiter of growth for most businesses. The bigger you grow the more cash your business needs to buy inventory, pay staff, develop intellectual property and provide credit terms to your customers. A cash flow crunch can force a profitable company to halt its growth or even become insolvent. A few small changes can dramatically improve your cash flow.
Here are our top ways to improve cash flow for your business:
Prepare a cash flow forecast regularly. As part of your annual plan, forecast your sales, collection cycle and payables cycle out a year or two. Your plan should address the important cash flow questions such as: What’s the maximum credit you can extend before you reach a cash crisis? What can be done to smooth sales and the resulting cash flows throughout the year?
Lease, don’t buy. Most vendors are offering payment terms on larger items. Not only can you keep the liability off your balance sheet, but you can also spread the payments over the lifetime of the asset while improving your cashflow. We recommend a lease where ownership of the asset transfers to your business at the end of the lease. We don’t recommend an indefinite leasing program for long-lived assets.
Offer discounts for early payment. Extending credit to customers can radically increase sales but can really hurt cash flow. Payment terms like 2%/10 net 30 day can increase the number of customers who will pay immediately. From a customer perspective, the annualized return is closer to 37% making this a huge incentive. You may have customers that want this discount at 30 days and this is a policy that has to be strictly enforced to add value to your business.
Conduct customer credit checks. Sometimes the biggest job might not turn out to be the most profitable if you have to chase the client for payment. Identifying potential clients who have had payment issues in the past is the best way to avoid a problem before it starts. If a client is a slow payer or has bruised credit they should be asked to provide deposits and security to improve your cash flow.
Ask for deposits. Extending that analogy, it’s ok to ask for deposits and progress payments to speed up payments.
Improve inventory management. Inventory represents a huge investment of your cash resources. It’s a luxury to have a huge cushion to supply your business but we can do better by analyzing your sales forecasts and average order times to optimize the right inventory to keep on hand.
Send invoices immediately. It’s important to bill customers as soon as work or delivery is complete. An efficient accounts payable system might take 7 days to receive, approve and issue a cheque. Obviously, delays in sending the invoice will add delays in receiving payment. You will improve your cash flow by efficiently billing customers.
Get extended credit from your suppliers. If I inform my supplier that I have a big contract and I’d like to use them to fulfill but would like extended terms, I’m leveraging the extra business to improve my cash flow.
Improve your banking. Apply for a line of credit when you don’t need it and keep it in reserve for critical moments. Use a High-Interest Savings Account to maximize the return on the minimum balances you need to keep in your business.
We can help.
Most of these suggestions are easy to implement and free. Success with each strategy will depend on your business situation and business norms in your industry. We can help you forecast and improve cash flows to ensure your business is never driven to receivership through too many sales. Give us a call or book a meeting to set up a consultation for your business.