Business Articles , Finance
You can be a good business selling profitable products and services, but still fail. One of the key areas for failure is failing to concentrate on cash flow.
In this article Tracy Ewen looks at some practical tips that you can take to improve your cash flow.
Planning your cash-flow projections – whatever might be happening in the economy – is absolutely fundamental. If you get it right, this process will alert you to any potential problems well in advance.
There are some simple processes that make it easier for you to get paid.
1. Make sure your invoices are correct
Finance problems can often be self-inflicted. It seems obvious but companies that send out incorrect invoices often find that their customers end up returning an invoice and requesting a new one.
2. Make sure your customers know your payment terms
Balancing credit terms vs cash-flow needs is something many businesses struggle with. Be sure to tell your potential customers upfront about your credit terms – before you provide your product or service.
3. Plan, plan, plan!
Prepare cash-flow projections for next year, next quarter and, if you’re on shaky ground, next week.
4. Look out for bad debt
Also, many businesses fail to look out for bad debt. This is a mistake – the more you can anticipate and mitigate bad-debt risks, the more profitable you will be in the long run.
Bad-debt protection cover provides clients with protection for up to 90% of any loss suffered by reason of the failure of a debtor to pay owing to insolvency or protracted default.
5. Higher sales do not mean better cash flow
Also, don’t automatically associate higher sales with better cash flow. It is sometimes the case that if a large proportion of your sales are made on credit, when sales increase, your accounts receivable increase, but not your cash.
6. Raise cash by selling assets
You may be able to raise cash by selling and leasing back assets such as machinery, equipment, computers, phone systems and even office furniture. However, you could lose your assets if you miss lease payments.
7. Look into invoice finance
Businesses might prefer to look to invoice finance. This is borrowing money against your sales ledger. In practice, it means cash-flow situations improve with every new customer signed. The two main types of invoice finance, Factoring and Invoice Discounting, are broadly similar in the access they give to funding, though Factoring also includes the outsourcing of the business’s credit control function.
With invoice discounting, there is less work for an invoice finance company to do. This will reduce the administration costs associated with the service provision and ultimately this will prove to be a cheaper option.
8. Asset-based lending
Asset-based lending (ABL) is another alternative. This enables a company to fund the high debtor levels associated with expansion by unlocking the potential of the assets on its balance sheet. Any asset may be considered – machinery, equipment, sales invoices, or a whole host of other options. With ABL, SMEs can ease their cash flow through regular payments over an agreed period of time.
9. Try to predict cash-flow problems
The key to managing cash flow is to be aware of any problems as early and as accurately as possible. Financial services providers are wary of borrowers who suddenly need to have money today.
10. Do your homework
Most importantly, do your research and ensure you find the most suitable option for your company. Do not just look to the short term in reviewing your borrowing options and managing cash flow, but rather be prepared for what may occur months or perhaps years down the line.
Tracy Ewen is Managing Director at IGF, www.igfgroup.com, an independent commercial finance company in the UK
Do you have any other suggestions on how to improve cash flow? Please leave them in the comments box below.
Published On: 14th Feb 2011Read more about -
Business Articles , Finance