Maintaining a positive cashflow is very important for any business that wants to be profitable. Improving their present cashflow is the aim for most businesses, in hope for growth. Of course, the matter is easier said than done, so this article goes into the details of what a cashflow is, and how to improve it.
Simply put, cash flow is the net difference between the earnings and expenditure of a company or business over a time period. A positive cashflow means that the company is earning more than it is spending, while a negative cash flow means that the company is spending more.
In more technical terms, a cash flow is the difference between cash inflow, which is basically the earnings the company makes in its dealings, and cash outflow, which is money spent on inventories, taxes, rents and so forth. A company’s cash flow relates to its financial health, as well as its overall image. A company with a good cashflow is likely to provide its shareholders with value.
Thus, maintaining and improving cash flow is very important for a business that intends to be successful.
These methods, when implemented correctly, can significantly boost cash flow for a business. We consider some of the most important strategies here.
Quick invoicing is arguably the first step towards quick completion of a deal. Of course, a quickly completed deal means that payment is forthcoming quickly too. This leads to timely cashflow, as needed by the business.
Naturally, there will be customers who still might pay late despite the invoice being issued early. However, an invoice issued early will reduce the chances for delays and more often than not, incentivise some customers to make an effort to pay early. In addition to that, prompt invoicing can leave a positive impression on the minds of customers.
Another benefit of quick invoicing is that the workflow is smooth. It ensures that there is no backlog of work for the logistics department to deal with. This is very important as it lets valuable time and energy be used productively.
Providing early payment discounts is a tried-and-tested way of getting customers to pay early. The position is a win-win for both sides. The customer has to spend a reduced amount of money, which is desirable for them. At the same time, the business obtains the required funds early or on time, which helps cash targets stay on track.
The company here has to ensure that providing early payment discounts does not undercut their profits. It takes considerable market analysis and judgement-making to arrive upon a suitable compromise.
Buying equipment represents a lump-sum investment that happens at one time. It is often lesser than the overall amount spent obtaining a piece of equipment on lease. Then why bother leasing equipment instead of buying it?
The answer lies in the lump-sum nature of buying any piece of equipment. Buying represents a single, large strain on the cashflow, that has to be borne in one business cycle. It is likely to form a large fraction of the cash outflow.
Instead of that, leasing equipment involves spending lesser amounts of money per time period. It cannot be said that leasing is less expensive than buying. However, for the purpose of cash flow, leasing allows for more spare cash to be available in any given business cycle.
Late payment penalties are a way of deterring customers from paying after the due date. When used along with early payment incentives like discounts, this strategy is likely to be very effective. This of course has to take into consideration the customer base and their preferences, as well as their history.
It is important that the business follow up on enforcing late payment penalties when a customer defaults. If it fails to do so, it could likely lose credibility and bargaining power with customers. Hence, it is a measure that must be exercised with discretion.
It is vital that a business knows the profiles of the customers it is dealing with. This can help it be discerning with whom it extends credit to and whom not to. Extending credit is always a risk. Such a risk has to be a calculated one for it to pay off. Customers who have a bad credit history are likely to default on payments in future too.
A business has to regularly keep an eye on their customers’ credit histories as well as update them regularly. Choosing to provide credit to a reliable customer is a good practice. On the other hand, doing the same with a customer with a history of defaulting is likely a way to harm cash flow.
If it is unavoidable to extend credit to a customer who has a poor credit history, then the business has to take care to at least charge relatively high interest rates to recoup some of the losses.
Any business has its set of loyal customers who can be relied upon for regular orders and timely payment. In such a case, it would be a good choice for the business to provide them loyalty benefits.
One such idea is the provision of loyalty-based discounts and special offers. This not only increases the chances of a sale, it also maximises the connection with a known segment of the customer base. This translates to good relations with said customers.
Another option is to provide customers with subscription services. This allows them to choose a special range of services. At the same time, the business benefits from a regular, guaranteed stream of income.
An obvious strategy to increase cash flow is simply increasing prices. However, this process cannot be done unilaterally as it is likely to result in backlash from customers if unplanned. This can result in a loss of sales volume, which overall leads to a downturn in income.
A business has to carefully compare its competitors and examine what they offer for, at similar prices. Then they can make an informed decision on what to do with their current pricing. In the process, they have to take into consideration the specific features of their customer base too.
Experimenting with prices is not a bad idea, if done with due diligence and research.
Some business savings accounts yield high rates of interest, which provide an excellent resource of free cash. This further has the added benefit of providing a level of security for the operation of the business.
While this might seem like a small step, it can have a significant effect cumulatively. Thus, it can boost the cash flow greatly in the long run.
It is not uncommon that two businesses have goods or services that the other desire. In that case, it is beneficial for both to be involved in a mutually satisfactory barter deal. This would help both of them earn a profit, as the fees they charge are the retail equivalents.
At the same time, both parties benefit because they can do away with potentially unwanted goods that would have otherwise fetched less prices on the market.
Many old habits of businesses can drag them down when it comes to cash flow. These could be seemingly simple as irregular payment cycles for their employees, leading to extra logistics for sorting out payments. A regular payment schedule can simplify this matter a lot.
An example of an efficient business practice is outsourcing work. This can result in a great drop in labour costs, which translates to money free for usage elsewhere. It is also likely that outsourced labour is more skilful at the required tasks, which is another boost when compared to local labour.
Yet another solution is to cut down on wasteful overhead expenses, such as excessive reliance on hard copies. Such a decision requires careful examination of the current practices of the business. Replacing wasteful procedures with more cost-effective ones can free up cash.
Invoice factoring is a process where unpaid invoices of one company are sold off to another. The sum covered is usually less than the actual worth of the invoices. However, it is a benefit for the company to whom the unpaid invoices are due.
This is due to two reasons. Firstly, the money is available instantly, instead of unspecified delays caused by late payments. This refreshes the cash flow for the company. Nextly, it also means that the government no longer has to waste resources pursuing the late payment. This leads to important savings in the long run.
Loans sound like large commitments for a business. Done rightly, however, they can open doors for new opportunities for the business. A normal loan can provide means of investing in new ventures for the business. This could mean an influx of capital, which could spur growth.
Another way they can obtain credit is based on the accounts receivable owed to them, as well as the inventory in their holding. In this case, the accounts receivable/inventory is used as collateral for the loan, to guarantee repayment. This provides a real-time boost to the cashflow of the business.
Alt text: Business loans can ease cash flow and promote growth.
Advance payment means that funds are promptly available for use. This smoothens cash flow significantly, and is hence a very good practice. A good balance between credit and advance payment is essential to keeping the business in good shape.
Asking for advance payment becomes especially important when it comes to customers who have a poor history with credit. Extending credit options to them is unlikely to result in timely payment of dues. It is a safe and healthy measure for both sides of the deal to pursue an advance payment, because it eliminates the difficulties that could arise from a sticky credit situation.
In conclusion, the methods discussed above leads to a real, measurable improvement for the cash flow of the company. Choosing which of these steps to implement, possibly even all of them, depends on the needs and status of the company involved. The company has to conduct a thorough research of its current situation and decide based on its priorities. Following these steps will put the finances on a healthy trajectory.