6 Ways Struggling Businesses Can Improve Their Cash Flow

Struggling businesses are always looking for ways to improve their cash flow. In this article, we share six ways small business owners can do exactly that.

Cash is the life blood of business. Strong cash flow is essential for small businesses to stay open for business. Companies go out of business because of poor cash flow strategies, and experience fast growth if their cash inflows surpass their cash outflows. Small Business Owners must therefore continually search for ways to improve the cash flow of their businesses.

How Businesses Can Improve Cash Flow

Here are some of the strategies a Small Business Owner can use to improve the cash flow of a business, and ensure that the business avoids, or survives, negative cash flows:

1. Promoting Cash Sales

Cash is king when it comes to keeping a business running. While customers usually prefer buying on credit rather than with cash, there are ways to drive more cash sales and make cash sales more desirable by customers. One of such strategies is to offer customers incentives for paying cash. For example, the business can offer a discount on cash purchases. The business can also offer small gifts for cash sales.

A key advantage in selling goods and services in cash, rather than on credit, is that it makes additional capital available for the business and eliminates the pressure that credit sales exert on the cash flow of the business.

2. Diversifying Sources Of Supplies

Diversifying sources of supply is one of the best kept secrets in managing procurements. Businesses that work with a diverse base of supplier are more likely to have lower overall operating costs.

A business does not need to use the same suppliers at all times. Working with a large database of suppliers gives a business the opportunity to engage several suppliers, which can deliver lower costs of procuring inputs, and a lowering of the cost of producing and delivering the products and services of the business.

Multiple sources of supplies also allow the business to pick and choose from the range and prices of supplies on offer from several suppliers. As each supplier is looking to make concessions in order to win the business, the competition between and among the suppliers tilts the bargaining power in favour of the business.

3. Liquidating Under-Performing Assets

A business that is experiencing a cash crunch can consider selling such assets as vehicles, machinery, inventory, etc. that are not producing cash for the business.

This means selling assets that can be converted into cash, like items that the business has not used in the past six months to one year. The income that accrues from these sales can then be used to boost the working capital of the business.

4. Intensifying Sales and Marketing Drive

The more people know the business, the better its chances of making more sales and more profits. An increase in marketing and sales efforts are two useful ways for improving the income-producing capacity of the business.

The Small Business Owner must understand that the business needs marketing and sales to drive revenue, and must resist the temptation of taking the narrow view that marketing is not a revenue centre. Marketing is at once a cost and a revenue centre, and must work closely with sales to drive revenue, especially at times when sales are slow and cash flow is weak.

Marketing and sales must align directly on the income objectives and priorities of the business. They must jointly develop and implement plans for creating revenue streams for the business.

5. Fast Tracking Collection Of Accounts Receivables

Having money with customers, and not collecting them, is a crucial cause of shortage of working capital in a business. A business must move fast on past-due receivables, and ensure on-time payments regarding deadlines, amounts owed and payment methods.

Cash flow issues arising from poor accounts receivable management can lead to failure of the business. Every business must formalise a process for collecting its accounts receivable. It must have a plan for spotting potential cash flow issues. It must address them before they compromise the health of the business.

The Small Business Owner must know the current payment status of all accounts receivable. He or she must be on top of the accounts receivable report that tracks and measures the payment status of every customer, and serves as an important tool for managing the finances of the business.

A low turnover in accounts receivables calls for the setting up of a crack team to embark on a debt recovery drive. Team members can be encouraged with rewards for any money they recover.

Another way to help bring in the cash is to give discounts for early payments, and offer payment plans for debtors having cash flow challenges.

6. Extending Time For Settlement Of Accounts Payables

In striving to generate positive cash flows, Small Business Owners primarily focus on the money that comes into the business through accounts receivables. However, Small Business Owners can also apply accounts payable strategies which aim to slow the flow of cash out of the business.

One of such ways of freeing cash to run the business is to negotiate with suppliers to extend payment terms on the company’s accounts payables. For example, if the business is already enjoying 30 days grace on its payables, it can ask for 45 or 60 days. This can be done by agreeing different grace periods with different suppliers.

The bottom line is that the longer the business holds on to its money, the better for its cash flow.

How To Turn Your Slow Invoices To Cash

One of the best and most creative ways for small businesses to improve their cash flow is to turn their invoices into cash. This is usually called accounts receivable financing.

As already highlighted in five (5) above poor accounts receivable management can lead to failure of the business. So small businesses can not afford to have its invoices lying around when it needs cash to survive.

What Is Account Receivable Financing?

You may ask, is accounts receivable financing? Sometimes, accounts receivable financing is referred to as factoring. Accounts receivable financing may be simply defined as a process whereby you sell the outstanding invoices for products or services already delivered by your business (otherwise known as receivables) to a financial institution (bank, finance house, etc.). Usually, it is sold at a price that is lower than the value of the invoices.

By this transaction, your business transfers ownership of the invoices to the financial institution. The institution then pays the discounted value of the invoices to your business. The deal occurs as negotiated and agreed in accordance with the quality and age of the invoices. Thereafter, it becomes the responsibility of the financial institution to get paid for what had been your invoices or receivables.

How Does Accounts Receivable Financing Work?

Accounts receivable financing works on the premise that your business has valuable assets (invoices) that can be financed. Based on this, the financial institution advances money to your business, for the slow-paying invoices of your business. Then, it waits for your customers to pay to it, and charges a small fee for this service.

Accounts receivable financing offers a source of immediate cash flow to enhance the growth of your business. It is collateral-free finance, unsecured, and does not require a pledge of assets or provision of guarantors.

Also, the speed of accessing cash for your business is mitigated by the cost that comes with discounting your invoices. Howbeit, this could be substantial over time.

In spite of this shortcoming, your business requires cash flow to support its various daily operations. Access to credit is usually tight, and traditional lenders are usually unwilling to help. Hence, accounts receivable financing can help your business in overcoming these financial challenges.

If your company does business with big companies, conglomerates and government, you know that they take their time in settling your invoices. Certainly, you suffer the agonies and frustrations of waiting for so long to get your invoices paid.

True. They get to pay. But they take their time and your time. They don’t care about your immediate challenges or about your suppliers that must be paid now. Neither do they care about the payroll that must be met at month end!

It is often a paradox of business that while your biggest customers may be your biggest assets; they can also be your biggest liability if they do not settle their invoices as and when due. Because your business incurs fixed and variable costs in regularly providing products and/or services to these customers, and the customers do not reciprocate equally in settling their invoices, they put your business in a position where it is constantly mismatching its expenditures and incomes, with the former always running ahead of the latter.

In this situation, you must find a way to bridge the financing gap. If you are the typical Small Business Owner who cannot go to a bank for a business loan, accounts receivable financing can give your business the money it needs, by unlocking monies in your slow-paying invoices. The key requirement for embracing this option is to have credit-worthy customers.

So, if your business is choke-full with credit-worthy, but slow-paying customers, one solution available to you is to finance your accounts receivables. It will provide the cash to pay your suppliers, Even more, it will help pay salaries and meet your assorted financial obligations. Also, it will minimise if it does not eliminate, your financial worries. It will give you the peace of mind to run and grow your business.

While a receivable financing arrangement is not a loan, it is important to back it with a written and executed agreement that spells out terms like the discount rate, the start or end date(s) if it covers multiple invoices over a period, when the business gets paid, etc.

If you need help improving your small business cashflow, contact us today.

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