Before asking your bank for a loan, try these options to free up cash from within your business to solve your cash flow problems.
Most small businesses experience cash flow problems from time to time and urgently need working capital. Business owners immediately think of their bank (or loans) when they’re short of money. But there are many more resources you can draw on before you ask for that expensive loan.
You can often free up funds from within your business by re-examining your business systems. The money you need might already be there, locked up in:
Below are some suggestions on how to unlock those funds.
Are you letting some, or most, of your customers pay late, effectively giving them interest-free use of your money for months?
"You can often free up funds from within your business by re-examining your business systems."
Here’s how you fix the problem – bill your customers promptly.
This is your future cash flow so you want to receive payment as soon as possible. Send an invoice with the goods, and date the invoice from the day the service was completed rather than waiting until the end of the month. The earlier the invoice date, the earlier you’re likely to get paid.
Change the terms for some of your customers, or for new customers. Can you reduce your payment terms to seven days or 14 days from the date of invoice?
Follow up promptly when invoices aren’t paid by their due date. Be polite but firm. If you haven’t got the time to do this yourself, then appoint someone to do it for you.
Establish the average age of your accounts receivables and set yourself the goal of reducing this age by a set target every month. If your customers or clients have been taking advantage of you because of your previous laxity in billing, then you may need to re-educate them. Do this politely so you don’t offend customers.
Consider offering a discount for prompt payment. If you’re going to pay a fee for invoice factoring, why not try offering a discount to your customers instead? Discounts are not a good option for low-margin businesses, but can be an option for high-margin operations.
You have to work out whether the use of money gained earlier is worth the discount you’re offering. Never give the discount if the person has missed the due date for the discount offer. Yes, some will try this.
Selling your invoices to a finance company (or factoring) is another option you can take. So instead of having to wait 30 days or more until a bill is paid, you receive your money upfront from the finance company that, in turn, collects the money from your customer.
The finance company will of course charge you a commission for this service. Be aware that there are pros and cons to consider. For example, the finance company might be quite heavy-handed about collecting the debts it has bought from you and could antagonize your customers.
Talk to them first about their collection methods.
Do you have too much money tied up in inventory? This can occur by:
Regularly review your inventory levels, your inventory turnover rates, and your purchasing policies. Can you free up money by reducing inventory? What about moving out of the slow-moving lines or having a quick sale of the slow-moving inventory?
It might pay you to reduce some items quite heavily to get some money in quickly.
Can you approach suppliers to take back some excessive inventory you may have ordered? They might help you out of a temporary tight corner as a goodwill gesture if you explain you have a temporary cash flow crisis, but that you wish to build a long-term relationship with them.
If you need additional funds to purchase more inventory, make sure that you’re replacing slow-moving inventory with the faster selling lines.
Your assets include prepaid expenses, vehicles, plant and equipment, fittings and property. Each of these can be a possible source of funds.
Fixed assets can often be the source of a significant amount of cash. Do you really put all your assets to full use? You might be able to sell off little-used assets such as machinery and hire suitable replacements when you require them.
It might make sense to sell your vehicles and lease them for a lower cost instead.
You might, for example, pay your insurance bill for the year all in one hit – but you could arrange to pay small monthly amounts. There might be an additional cost for doing this, but you must weigh up the extra cost against the advantages of 12 small payments that your cash flow can comfortably handle versus one large annual payment.
Then approach your accountant to ask if you can pay a set amount monthly instead of facing a substantial bill once a year.
Do the same with your utility bills – ask to average out your bills, instead of paying relatively small bills in summer and being hit by big ones in winter. Watch out for automatic payments, too. These can often throw out your cash flow projections because you’ve forgotten to include them in your cash flow forecasts.
Apart from the good debt collection habits already discussed, you could consider not offering credit to keep the funds inside your business rather than locked up in accounts receivables.
If your customers are cash-strapped, they can use their business credit cards for purchases from you. However, be aware that you’ll have to pay a percentage in commission on credit card purchases. You might want to take this into account in your terms of trade by including a surcharge for payment by credit card, provided this doesn’t discourage some customers from dealing with you.
If you supply goods over a period of time, or if you’re a service business, invoice for agreed periodic progress payments. This is a common method of ensuring you get some cash flow during a project instead of waiting until the end of a project or delivery period to invoice – and then still waiting at least another 30 days for payment.
There’s another benefit here, too. If the customer turns out to be unreliable, you’ll discover this early on, allowing you to cut your losses before they mount up and drag your business down.
Ask your suppliers for extended payment terms to give you the opportunity to sell the goods first before you have to pay for them. If your supplier won’t budge, try to tighten your ordering process so that you order items just in time, rather than have them on the shelf for longer periods.
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