If your business has upcoming payment obligations, you will need to focus on improving your cash flow now. There are some simple and some complicated methods of improving your cash flow. Ultimately the right cash flow management for your business will be reliant on your industry and specific business needs. Yet there are some universal ways to improve your cash flow that apply to business across different industries.
1. Start with evaluating your A/R Management Process
Approximately 60% of all invoices are paid late. Managing your receivables can be a time-intensive process, but it is necessary in order to get paid. Collections companies can be expensive, and you’d rather it not reach that point. An accounts receivable management process includes invoice verification, monitoring the aging of your receivables, and collecting on open invoices.
The first step is issuing an invoice immediately upon delivery or completion of goods or services. You will want to follow up with your customer and ensure that they received the invoice. Verify the amount due and when it is due. This will help you avoid any payment issues down the line. Sometimes there are mistakes on invoices and they simply never get paid. Invoice verification with your customer can save a lot of headaches.
Sometimes this working capital management process includes emailing or calling your customers with reminders of upcoming payments. This can be as casual as an after-sales call to ensure everything is going alright. It does not have to be an aggressive or off-putting phone call. You want to create good feelings between yourself and your customer, so use this contact as an opportunity to further your relationship not sever it.
Collecting on your open invoices is ideally not an issue you would face. If you follow your A/R management procedures in verification and monitoring, then your customer should pay the invoice amount by the due date. Sometimes there are problems that arise, and although it’s best to create an open dialogue before this point in order to solve any potential problems, it’s not always in your control.
Having a process in place to verify invoice receipt, confirm payment deadlines, and reminders for upcoming payments can save a lot of pain in the future. With proper accounts receivable management, you can avoid the issue of customer non-payment or late payment. This will improve your cash flow by ensuring you actually get paid.
2. Extend Your Own Payment Terms
Typically, larger businesses can get away with this. It doesn’t solve your cash flow strain it just places the burden on your suppliers. Many small businesses don’t have the option of paying their suppliers in 60 or 90 days, but if you do have the option then you may have more cash on hand to meet your other obligations. This may be extending terms from 10 days to 30 days, or it may be extending terms from 30 days to 45 days. Ultimately this method relies on your relationship and importance to your supplier. If you have good payment history and are an important customer, then you may be able to negotiate an extension in your credit terms with them.
3. Offer Vendor Discounts for Early Payment
Some businesses offer a small discount for early invoice payment. You can extend this option to your customers. Early payment at a discount means more cash on hand and less capital tied up in your receivables. This option is debt free, and your customers won’t mind the discount you’re offering. The only drawback is that it is not a certainty that your customers will choose this option or even have the cash flow themselves to pay early. Despite the unreliability of this cash flow improvement method, it can be worth the call to your large or repeat customers that pay on 30- or 45-day credit terms. A 1% discount for payment at 10 days can be mutually beneficial.
4. Trim Unnecessary Costs
Trimming your unnecessary costs could be offloading inventory you already purchased, cancelling or downgrading a software subscription that you don’t use, or even streamlining your administrative processes to lighten the burden on your employees. This means maximizing the assets you already have for your business and making tough decisions about your recurring expenses. Are you consistently warehousing a surplus of inventory? Do you use every subscription tech service that you pay for? Are you wasting time and money trying to expand your product line rather than homing in on your area of expertise?
Take a look at your profit and loss statement. This will tell you if you have any areas that could use trimming. You should be reviewing your expenses annually anyways, and your business plan can guide your decisions when it comes to trimming unnecessary costs.
5. Sell Your Invoices
Similar to offering vendor discounts for early payment, selling your invoices to a factoring company means less waiting and more cash on hand. Factoring companies purchase open invoices at a discount. It’s a reliable option as the money will hit your account the same day that you invoice your customer. Added benefits are that factoring is debt free, can grow with your funding needs, and can free up your time by handling the tedious aspects of A/R management.
Invoice factoring is a reliable small business funding method for times of uncertainty or recession. Factoring services do not rely on your revenue or personal credit. This means that new business owners or entrepreneurs with a previous failed venture are eligible for the same low-cost factoring services as established businesses! Eagle Business Credit, a factoring company in Atlanta, GA, provides reliable cash flow to small businesses to help them meet their obligations and grow.