8 Financial Solutions to Manage your Cash Flow

8 Financial Solutions to Manage your Cash Flow

Optimising financial expenditure in SMEs

To understand cash flow and how to manage it adequately, one first needs to understand what cash flow is, how it works, and how it impacts a business. The term cash flow refers to the money that flows in and out of business in any given month.

  • Cash outflow: refers to all money going out of a business such as accounts payable, cost of raw materials, rent, loan repayments, taxes, salaries, etc. In short, it is the money leaving the business to pay expenses.
  • Cash inflow: refers to all money coming into the business such as income, interest on investments, product sales or accounts receivable.

A business needs a healthy cash flow to run efficiently. If there is more money flowing out of business than coming in, it will have a negative impact on the ability of the business to operate and to meet its financial obligations. A positive cash flow is when there is more money coming into the business than is going out. It is this disposable income that allows the company to improve its processes, production, growth and to increase its profitability.

Maintaining safe cash flow levels is imperative to success because any business that is unable to meet its financial obligations, will become unprofitable.

One of the fastest ways to lessen the impact of an urgent cash flow needs, when there is no expected income, is to make use of short-term finance.

Below are 8 ways for a business to mitigate potential cash flow issues.

1. Bridge Financing

Bridging finance (also known as a bridging loan or gap financing) is an asset-backed form of financing used to maintain liquidity while waiting for an anticipated cash inflow. Bridging finance is considered a short-term financial solution as it is provided for short periods, typically not exceeding nine months.

The benefit of this form of financing is that it is quick to obtain, which means that this form of financing is the perfect solution to bridge a short-term financial gap while a company looks for a more permanent solution. Usually, by the time a long-term loan is approved, a business would have already received the bridging loan.

    Other benefits include:
  1. The business has the flexibility to repay the loan in full before the end of the loan term or it can repay it over a fixed period.
  2. Ensuring prompt repayments on the bridging loan will improve the business’s chance of qualifying for a loan they may not have been eligible for previously.
2. Invoice Factoring

Despite the costs – and risks – associated with taking on regular debt, many businesses don’t have another option.

While clients often require credit terms of up to 120 days, the business still need to cover its expenses in the interim. This is where invoice factoring can assist a business.

Factoring is when a business sells its accounts receivable to a third-party organisation and receives the money upfront. This allows the business to meet its financial obligations, remain profitable and grow despite late-paying customers.

The early cash inflow allows the business to continue operating and provides the company with business opportunities that it may otherwise not have been able to pursue.

3. Inventory/ Stock Financing

Stock or trade finance is a funding mechanism designed to assist a business to purchase stock.

Trade finance is an asset-backed facility designed for a growing business. It allows a company to increase its working capital through funding its operational cycle, that is, from the time payment is made to a supplier until receipt of funds from customers, thereby leaving internal funds free for other productive uses, such as sales growth.

A business would require stock or trade finance to grow its stock levels to deal with increased sales and business activity, to take advantage of price increases or to ensure efficient key stock item levels.

Trade finance is typically a layer of short-term finance over and above conventional banking finance which increases the flexibility of a business to manage growth through the purchase of additional stock.

4. Purchase Order Financing

Purchase Order Financing or PO financing is used by companies to help fund supplier costs associated with a specific customer order. This form of financing is traditionally only suited to businesses which sell finished products, such as resellers and wholesalers, as the money is paid directly to suppliers on behalf of the company.

Unlike inventory/stock financing, PO financing cannot be used to leverage raw materials or for work-in-progress products but can only be used for a specific customer order. It cannot be used to fund additional inventory or general operating expenses.

One of the benefits of PO financing is it allows a business to take on more orders because up to 100% of supplier costs are covered, freeing up cash for other business operations

1. Reduce Expenses

One of the first things businesses cut when wanting to improve cash flow are its expenses. While this is a good way to improve cash flow, it may result in cost reductions that could hamper a company’s ability to generate revenue. It is therefore essential to properly analyse the businesses expenses and their relevance to the well-being of the company before putting them on the chopping block.

A business needs to recognise that there are 'good' and 'bad' expenses. 'Good' expenses are those that enable a company to perform better whereas 'bad' expenses not only cost money but provide no value. An example of a 'bad' expenses would be interest paid on long term loans or paying rent on space that isn't being utilised.

2. Renegotiate Payment Terms

If a business's disposable income seems to vanish as soon as it comes in, it is important to renegotiate payment terms with customers and suppliers.

If your business has all its payments due at a specific date, consider negotiating different due dates and arrange to spread throughout the month to stagger cash outflows so as not to drain all the cash flow at once.

Ideally, you want to pay your suppliers as little as possible upfront and the remainder on completion or within three months of delivery. The reason that it is best to settle with suppliers on delivery is because it reduces financial risk and safeguards the business against losses if the supplier is unable to deliver.

On the other hand, a business should incentivise customers to pay for its products upfront, as this increases cash flow and allows the company to use this income to improve its operations. One way to encourage early payments is to provide discounts to customers that pay early.

Overall it is essential to review supplier and client payment terms regularly to manage cash flow better and to troubleshoot any future payment problems.

3. Automated Invoicing and Billing

    Automating monthly invoice and billing processes provides the following benefits to a business:
  1. Reduces errors.
  2. Allows customers to receive their invoices sooner rather than later.
  3. Enables the company to evaluate who pays on time and who pays late,
  4. Makes it easier to penalise late payers and collect overdue invoices.
  5. Enables a business to assess exactly how much money is coming in and when it will be received.
  6. In essence, automating these processes, it allows the business to better plan and manages its spending and cash flows.
4. Credit Management Service

Outsourcing a business’s accounts receivable to an expert provides a business with expert insights and the best cash flow management possible, at a discounted cost. Outsourcing can reduce process costs, provide enhanced growth, allows for faster cash recovery (improves cash flow), thereby resulting in more opportunities for the business.

By outsourcing a business's credit management and debt collection to an expert, the company knows that its finances are being managed efficiently and it allows the business to remain in control of its cash flow.

Outsourcing also frees up other internal resources which can then be used to focus on building and improving other areas of the company.

Bottom Line

Cash flow is the lifeblood of any business and without enough cashflow a business may not survive, let alone thrive. Paying close attention to a business's cash flow will allow you to mitigate possible problems before it becomes a threat to the business.

There are many ways to solve cash flow problems and often these solutions will boost the business and catapult it to success.

Merchant Factors is a specialist factoring company with over 31 years’ experience in assisting companies with their credit control and debtor administration processes. Not only can Merchant Factors solve the immediate cashflow-productivity problem, but it will also free you and your team to drive productivity in the core, strategic elements of your business.

For fast, flexible business finance – contact Merchant Factors today

Finance beyond the Numbers.