Business Cash Flow Dos and Don'ts
Every company, whether up-and-coming or well-established, needs to make business cash flow management a top priority.
Without working capital, you’ll be forced to cut corners. This could impact your product quality, your ability to retain employees, your relationships with suppliers and your good standing in the business community. Even if you can scrape together enough cash to keep things ticking over, you may have to put your growth plans on the back burner.
In order to avoid getting into any of these situations, you need to have a sound business cash flow strategy in place. Here are some DOs and DON’Ts to guide you:
- Do hire with care
One sure way to control operational costs is to hire only when it is really necessary – and then make sure that you hire someone who adds as much value as possible to the business. It also costs to hire again and again, so make sure to find employees who are able to commit to the role. Then treat them with respect and keep them inspired.
- Do choose your customers wisely
It may seem crazy to turn down potential new business. But taking on the wrong customer can impact your business cash flow fast. It’s imperative to do a thorough credit check on any new prospect before working with them. If their credit history is concerning, there’s a high risk they won’t pay your invoices on time – or at all. And don’t just do one round of due diligence and stop there. It’s advisable to continue monitoring your customers’ creditworthiness on an ongoing basis, so that you can flag potential payment problems before they happen and make a contingency plan.
- Do negotiate with suppliers
Try to arrange credit sales terms with your suppliers that give you as much time as possible to pay their invoices. This will give you some breathing space while you collect your own receivables, putting you in a position where you’re less likely to have more cash flowing out than in.
- Don’t manage your own business cash flow
While you may have been resource-strapped when you first founded your company, don’t make a habit of managing your own business cash flow. Hire a specialist to handle this, or train a trusted and capable employee to keep close tabs on your cash flow for you – monitoring daily credits and debits to ensure there’s always working capital available. If you do this job yourself, you’re likely to be distracted by all the other decisions that need to be made – and you may drop the ball. Alternatively, the administrative burden may take up too much time and erode your ability to increase sales and win new contracts, which again impacts your business cash flow.
- Don’t tie up capital in receivables
Your sales figures may be looking very healthy, but this does nothing for your business cash flow until you are actually paid for the goods delivered. If you can get your customers to pay invoices quickly, this is your first prize. However, most customers expect credit sales terms of 30, 60, 90 or even 120 days. Waiting this long for your money can put serious pressure on your finances. If you can negotiate better terms, definitely do.
- Don’t take a narrow-minded approach to funding
If you do reach the point where you need a business cash flow injection, it’s important to understand that traditional loans and overdrafts are not the only way to go. An alternative funding option like factoring can provide you with fast, flexible access to the working capital you need. It’s also a finance facility that grows as your business grows, so that you can continue to access enough capital to meet your expanding overheads.
Have you considered factoring?
Factoring is an attractive solution for both cash-strapped and growing businesses. This well-established business funding strategy works as follows:
- When you partner with a factoring company, you get access to the working capital that is tied up in your unpaid invoices. The factoring firm effectively “buys” your accounts receivable and pays you around 75% of this value upfront.
- The factoring company takes on the responsibility of managing your debtors’ book, collecting invoice payments directly from your customers – in accordance with your agreed credit sales terms.
- Once the customer’s account has been settled in full, the factoring company pays you the balance owing, minus an agreed admin fee.
This approach solves several of the problems discussed earlier. You get a dedicated team managing your accounts receivable and also conducting professional credit checks on your customers. You also get to free up more of your time to focus on work that adds value to your business. And because you have working capital, you can negotiate new terms with your suppliers, perhaps getting discounts for paying cash on delivery. All of these benefits boost your cash flow – and also help to offset the cost of factoring.Ready to find out more? For fast, flexible finance that’s aligned with your business goals – contact Merchant Factors today.
Finance beyond the Numbers.