All enterprises are concerned with cash flow and with the importance of maintaining a strong cash position. However, for individuals about to embark on a new business venture, the issues of cash flow can be especially concerning. Your new business needs working capital to finance its day-to-day operations, meets its payroll, cover its payables and finance its future growth. However, as a smaller enterprise, it’s more than likely yours won’t be the first in line to get paid. It’s but one of the costs of owning a new business; smaller suppliers tend to be lower on a customer’s priorities. This is especially the case in today’s economy, one marked by lower demand for products and late customer payments. Financing your receivables is a major concern, but an argument can be made that a poor cash position is considerably worse. Therefore, what can your new venture do to improve its cash flow?
Offer Multiple Payment Options:
Customers want to save money. As such, it’s essential that your enterprise offer its customers several different payment options. Prepayment or partial prepayment is one solution. Another includes offering net-10 day terms with a 1% discount on invoices. Getting your customer to pay sooner will not only improve your cash flow, but it will lower your company’s costs of financing. Give your customers the opportunity to pay a portion of their purchase upfront. In return, use discounts on invoices, reward programs and incentive plans to get customers to pay sooner. A great source for prepayment includes customers with poor credit ratings, ones who have no choice but to prepay. Very few of your competitors will focus on these customers, which ultimately makes them easy to service and easy to close sales on.
Pursue Alternative Financing:
Given the high costs of inventory financing and receivable financing, a number of companies are turning to receivables factoring to lower their cost of capital and improve their cash flow. Factoring is an asset-based financing option that allows your company to use its receivables as a form of credit. You sell a receivable to a financing company who then provides your enterprise with an advance on the value of that receivable. The financing company collects on the invoice, charges your company a fee and reimburses your enterprise the difference between the original advance and your customer’s final payment. Similar options include purchase order financing and inventory financing. Each option helps to lower your costs of financing, and improve your cash flow by helping you retain more working capital.
Negotiate Favorable Payment Terms:
Your own creditors and vendors can help you alleviate the going concern of cash flow. First, maintaining a strong cash position is all about saving money. Therefore, when your new enterprise isn’t concerned with cash flow, or has entered a high customer demand period, then make sure to get your own discounts for early payments. This will offset periods where business is slow and your cash position is more of a concern. In addition, work with your vendors and creditors to extend your payment terms during slower periods of your year. Show a willingness to work with your vendors and they might just help you in return.
Managing cash flow is all about mitigating the ups and downs of your company and its business cycles. You are bound to enter slower periods of the year, periods where cash flow becomes more of a concern. However, offset these lulls in demand by taking advantage of peak demand cycles. Use those cycles to secure savings. This will help even out your overall cash position for the entire year.
Isaac writes on behalf of several Cornwall based businesses including Winter Rule who are a Chartered Accountant, one of the South West's largest independent accountants, based in Truro, Cornwall. With Winter Rule you get a first class service and fresh ideas at an economical cost. For an Accountant in Truro or Cornwall tax advice visit Winter Rule.