As a trusted business advisor and CPA, I am in a great position to see and understand cash flow triggers and patterns as well as advise business owners when they are facing seemingly insurmountable cash-flow issues. It seems to me the majority of businesses have the same general cash flow issues when experiencing some level of cash flow anxiety. I have highlighted 10 tactics below that may perhaps benefit a company’s cash position. Naturally, not all the tactics I have highlighted will work for all businesses all the time. Nevertheless, some combination of these can be utilized in most any business and regardless, this should get you thinking about solutions.
If you are pondering the absolute best strategy for the long-term, then of course, using your free cash-flow is the answer, quickly followed by traditional financing, whether equity or debt (more about this in a later post). The issue often faced is when these preferred options aren’t readily available. Conversely, a business owner must consider alternative cash-flow management strategies to ease the drag and demand on their cash position or working capital.
Keep this in mind: All businesses go bankrupt because they run out of cash!
1. A little upfront or milestone payments
This works best for companies whose product or service require substantial cash outlay or extensive effort before they deliver and in turn get paid. Service providers like designers, developers, marketing agencies, CPA’s, landscapers, lawyers and certainly construction companies are prime candidates for an early payment or deposit (down payment). Of course, not all your customers or clients are willing to make an upfront payment, but you won’t know if you don’t ask.
2. Speed customers up on payment
Have you ever received a 2% or even 5% discount for paying your invoice early, as in with 10 days? That is exactly what this means. Incentivize your customers or clients to pay you early, even if it means offering a discount. The easiest and probably best way to do this is by offering a discount. We have probably all seen the “2/10, Net 30” listed on an invoice. Ever considered what this means? Actually, this means giving the clients or customers a 2% discount if the invoice is paid within 10 days and if they don’t take advantage of the discount period then the entire balance is due within 30 days. If you allow your customers to have credit and essentially you have accounts receivable, then another way is basically staying on top of your customers’ balance owed to you. This can be accomplished by having someone reach out to the customer at 15 days, 30 days or whatever your policy. Just as a reminder to pay timely – this can be a soft reminder like an email or statement or more aggressive like a phone call or visit.
3. Delay or reduce expenses
Let’s assume you are unsuccessful with the above strategies, then we can always slow pay or delay expenses. Companies that build products could easily consider using lower cost inputs. Service companies on the other hand could try to become more efficient or slow pay possible expenses. Many times, business owners end up with a sizable amount of cash sitting on the shelves. Meaning buying up or holding too much inventory and perhaps they should consider draining existing inventory before acquiring new inventory. One last idea is to hire part-time or contract employees or outsource certain task, like accounting, to replace full-time employees.
4. Request more favorable payment terms from vendors
Asking for an extra two weeks to make a payment could be the difference between missing payroll or expanding your business. If you already have terms that are say 15 days, then no harm to ask for 30 days. Perhaps they are 30 days, then please ask for 45 days. You may be surprised at how many vendors you can get to extend payment terms. It certainly helps if you have always (or at least most of the time) paid their invoices on time.
5. Finance purchase orders
Many businesses need a large sum of cash to fulfill their purchase orders, this is where financing of the purchase orders is a possible fix. Normally when you have a purchase order in hand, the financing company will pay the vendor, so you can get the goods the company needs to fulfill the purchase order. This circumvents the all too often issue of finally getting that big order, but now you can’t do it because you don’t have the cash to buy the raw materials or invest in the needed labor, equipment, etc.
6. Increase margins
Duh? Who doesn’t want to increase their margins? You generally have two ways at your disposal to do this – 1) you can increase the sales price or top side; or 2) you can decrease the cost involved. Sounds simple enough. However, this isn’t always easy, and most businesses are already operating at optimal levels. Perhaps you have a product in short supply or high demand then a price increase could easily be justified. Speaking from personal experience, I almost always find costs that can be trimmed or altogether eliminated once I start looking into a business.
7. Sell or lease back of equipment
So, you made it this far and still need cash. Well, this is when you assess if you actually need everything you own. Do you have idle equipment? Can it be sold for cash? Maybe you have equipment in use that you own – then look at selling it and leasing it back from the new owner. This happens a lot more often than you probably think. This specifically makes sense for long-lived equipment that is easy to move or install. Most copiers are leased this way. You could even sell all your office furniture and lease it back, using the proceeds to fund operations. Over the past 10 years it has become more common for hospitals to sell their buildings (the hospital) to investors and then enter into a long-term lease agreement. This provides an influx of cash to the operations and keeps the lease payments affordable.
8. Sell future revenue
I don’t like this one, but it is a viable option. It involves taking a loan that is automatically repaid via a percentage of the credit and debit card transaction volume received by the business. Think about a restaurant or other high credit card using business, the loan is repaid based on transactions processed over the card machine. For example, you may sign up to payback 1% of all credit card sales and so the funds are automatically deducted like a credit card fee to repay the cash advance.
9. Post-pone or push work
As you probably have figured out by now in your business, managing cash-flow is all about timing. Most of us couldn’t handle the same amount of sales for all of last year hitting in January. It would be a nice problem to have, they say, but can you imagine trying to order, staff, buy, assemble and so on at that level? You could investigate with the client or customer the demand and timing of their work, perhaps they can wait a month or a few weeks until your cash if flowing a little better. Make it attractive you’re your clients and perhaps offer a discount for postponing the work – this is far cheaper than a) not doing it at all or b) breaking the business because you run out of cash.
Last and maybe the least favorable, but still an option is the selling of your invoices, otherwise known as factoring, discounting, financing, etc... I am not a fan of this option, but if you have no other options, this certainly works well. This actually is a very accommodating and certainly fast form of funding that is offered to the most common B2B type companies. This is essentially how it works: Once you bill your customer for work completed and they agree, and they are going to pay in 60 days, then the factoring company will advance you money on the invoice and when the customer pays, that payment goes to the factoring company. So, in this example rather than waiting 60 days for the client to pay, you are in essence selling the invoice to the factoring company and they are paying you money upfront. Obviously, there is a fee involved and most likely it is 7,8, or 10% of the invoice. Therefore, if you invoice is $10,000 to your client, the factoring company may give you $9,000 (or 90%) today and then the $1,000 remaining is the “fee” that the factoring company is making. Please do your homework here and make sure you go with a reputable company as opposed to a ‘loan shark’.
Availability of cash, the flow of cash and of course overall working capital is what keeps your business afloat. Hopefully, this has shed some light on a few options that are available. Remember from the beginning that all companies go bankrupt because they ran out of cash. So, if necessary, please deploy the needed strategy and continue to maintain and grow your business.
Don’t be afraid to reach out. I am happy to discuss this or any other things going on in your business or if you just have general business questions. firstname.lastname@example.org
All the best,