Cash is the lifeblood of business. Even profitable businesses can fail when cash flow monitoring does not occur. Cash is needed for investing in growing and for working capital. Without enough money to pay lenders or suppliers, banks may foreclose, and suppliers could cut supplies and businesses quickly die.   

Developing a cash flow forecast is a great place to start when focusing on cash management. It will give early warning of problems and enable scenario modelling to review the impact of potential business changes. Remember, what you don’t monitor will not get managed.

The aim is for every business to be profitable and have the cash it needs to grow, but the reality is that all companies will go through seasons where cash-flow enhancing strategies are required. Below are some ideas on how cash-flow can be improved. These will not apply to all businesses but will give you some ideas on where to start.

  • Ask for a deposit or milestone payment  

If your business is one whose product or service requires substantial cash or effort before being delivered, it is a candidate for requesting clients to pay deposits or milestone payments. Not all customers may be willing to pay this, but the only thing that is guaranteed is that you won’t get if you don’t ask.

  • Request customers to make payment of invoices earlier

An alternate option for managing cash-flow is to get customers to pay invoices more quickly. Increasing payment speed can take several forms. An option is to utilize payment technology to simplify the payment of your invoices; another is to offer discounts to customers for early payment.

  • Cut or delay expenses 

If customers won’t pay faster, another option is to delay costs. This strategy can take on a variety of forms, depending on the business. Manufacturing businesses may consider using lower-cost inputs to deliver the same goods or service, while a service business may opt for spending less time on the same work. For businesses holding inventory, it is essential to manage the stock level to control costs. The lower the inventory holdings, the better from a cash perspective. An excellent inventory management tool and well documented inventory processes can assist with this. Labour can be a high cost for many businesses and reviewing the mix of employee types and levels can assist with the reduction of the expenses. Outsourcing certain functions may also be a consideration. All businesses owners should consider the impact of personal expenses on their business. Is the owner remuneration at an appropriate level that is not impacting the cash flow needed to operate and grow?  Consider both salary and expenses paid on behalf of owners by the business. It may entail owners restricting lifestyle spend for a period. Personal expenses may be the ones business owners have the most direct control over.

  • Request more favourable payment terms from vendors

Suppliers may have the incentive to offer extended payment terms if they can be guaranteed business and getting an extra two weeks to make a payment could be the difference between missing payroll and expanding the business. Depending on supplier relationships, at least some will be open to a more favourable arrangement. And be persistent! Even if a supplier has previously declined, you have little to lose by asking again. Of course, the timelier and more dependable at paying them, the greater chance they will be willing to extend their terms.

  •  Financing purchase orders 

Manufacturing or retail companies that require a significant amount of cash to fulfil purchase orders could use the financing of purchase orders as a solution. Once a purchase order is on hand, the financing company will pay the supplier, so the merchandise or inventory the business needs to complete the purchase order is acquired without an outlay of cash. This removes the problem of getting a large order, but not being able to fill it because of lack of money to buy the inventory or materials.

  •  Increase margins 

Increasing margins will help spin-off more cash that can be used to fund operations. The only two ways to increase margin are by increasing selling price or decreasing the cost to deliver the product or service. Neither of these may be feasible for most businesses. However, raising prices is an option for businesses that have a high demand product or service, or a unique product that is not available from competitors. Use this strategy carefully so as not to alienate.

  •  Sell or lease idle equipment 

When cash is scarce, everything should be on the table. This is especially true of unused equipment that can be sold for money or leased to another business that can put it to use. Even if the business currently uses the equipment, it may be able to rent the same equipment for less, while the proceeds from the sale can be used to fund other needs in the business. This makes sense for equipment that is easy to move, transport or install. An added benefit is also be saving on storage costs.

  • Selling future revenue

A merchant cash advance is a possible strategy for consumer businesses like retailers and restaurants. It involves taking a loan that is repaid via a percentage of the credit and debit card transaction volume received by the business.  Just make sure that the businesses margins can support the cost of the financing. Otherwise, this strategy could pave the way to financial ruin.

  • Turn down, shift or post-pone work 

Managing cash-flow can be as much about timing as anything. Getting too much work all at once is overwhelming for most businesses. On the flip side, not enough could mean closing down the business. Thus, smoothing the volume of business can be a helpful way to manage cash-flow. This may include turning down or postponing work at some times of the year. This strategy is not realistic for companies with strongly seasonal business. Think win-win. For instance, you can offer good clients a discount for postponing their work, order or service.

  •  Sell invoices 

Selling invoices, also known as invoice factoring, invoice discounting, invoice financing, etc., is a very flexible and quick form of business funding available for B2B companies. In a nutshell, invoices are assets of a business locking up cash until the customer pays. Alternatively, rather than waiting 60 days for the client to pay, a business can “sell” the invoice to a factoring business and get money upfront.

If you would like to discuss which of these suggestions would suit your business or would like to know more about improving your business’s cash situation, we would be happy to assist you.  You can phone Adrians and ask to speak to one of our managers or partners on 07 3832 7544 or email us at hello@adriansca.com.au. Remember, Cash is King!

Angeline Bryer