Steps for Better Cash Flow
Accounts Payable is large source of financing for many small and mid-sized businesses. That means many non-finance companies are acting as a funding source through their slow collections of accounts receivables.
When a business is waiting to get paid that money is essentially loaned to the customer. It is reported that in the U.S. B2B customers are taking, on average, 54 days to make payments. This is a 54 day loan and as a business experiences growth they will have more customers and a larger volume of money they are “lending” to those customers.
A major cause for small business bankruptcy is inadequate cash inflows. How well a business manages its cash flows will determine its success. Companies that can shorten the number of days they are waiting for their invoices to be paid are obviously in a better position to manage their cash, which in turn provides a better competitive position.
Companies have control of their cash outflow because they
determine when they write the check. However, the circumstance is reversed for cash inflows.
Tips to improve small business cash
Analyze how the company’s needs for cash occur.
Ask for longer terms from vendors.
Ask for payment up front.
Automate the A/R process.
Check your customers’ credit before doing business with them.
Consider any receivable aged beyond 120 days as doubtful.
Develop a strategy to meet the cash flow needs.
Develop both short-term and long-term cash flow projections.
Don’t offer terms if when they are not needed.
Don’t wait until a receivable is aged 60 days before making a collection call.
Eliminate free customer financing.
Expect slow paying customers to continue that trend.
Get accurate customer information.
Keep excellent records.
Know the best funding sources in your industry that can fund your capital needs.
Maintain good relationships with funding sources – in the event they are needed.
Promptly provide gentle reminders to the slow payers.
Provide written quotes that clearly detail payment instructions.
Quality control issues can ruin a company’s cash flow rhythm.
Quickly cash checks.
Review all policies keeping the company from promptly converting receivables to cash.
Shorten your credit terms.
Spend time organizing the departments for the accounts receivable and collections.
Standardize the company’s quoting process.
Track and fix quality product quality issues.
Use historical cash flow statements to understand the previous use of capital.
When a company has accomplished what is possible and still has a need for cash flow assistance due to growth, new customers, market opportunities, etc., then a Line of Credit secured by the company’s receivables may be an option that will quickly provide the funds the business requires.
A funding source that has provided funding services to larger corporations has opened a new funding opportunity for small to mid-sized businesses. The line of credit program is similar to accounts receivable financing, but it may be a considerably less expensive form of funding.
Unlike a Factor that purchase the invoice at a discount rate,
the Line of Credit Funder provides funding using the accounts receivables as collateral and charges a monthly interest rate similar to traditional bank financing. When possible, and as part of the
Funder’s fee, the receivables are insured providing the borrower more confidence they will not suffer a total loss on an unpaid invoice.
Lines of Credit are available from $50,000 to $1.5M with 12 month terms. The borrower can draw funds from the credit line at their discretion. The Funder does require borrowers to be established with 2 years sales track record and be viable credit worthy companies. This is not a “last resort” type of financing. Start-ups and companies struggling to avoid bankruptcy are not candidates for this funding.
By reducing Days Sales Outstanding (DSO), the number of days of annual sales sitting in account receivables, cash on hand will increase. This can be accomplished by first improving the company’s process of quoting, invoicing and collections, and second by obtaining a line of credit to even the peaks and valleys of the company’s cash flow.
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