Posts

7 Ways to Speed Up Business Cash Flow

7 Ways to Speed Up Business Cash Flow

Waiting on customer payments? Leverage these ideas to speed up business cash flow so you can focus on growing your business, instead.

STUDY – 3 Out of 10 US Businesses Not Paid On Time

According to the 2018 Global Trade Credit Payments Study by Dun & Bradstreet, U.S. companies in many industries are not being paid on time. While nearly 7 in ten financial services invoices are paid by the due date, as few as 38 percent of manufacturing invoices are paid on time.

Average time businesses wait to get paid

The Financial Services industry wins again when it comes to the fewest number of invoices that go beyond 90 plus days late before getting paid. Retail Trade, Construction and Transportation and Distribution industries have the most invoices that remain unpaid three months past their due date.

Retail Trade, Construction and Transportation and Distribution industries have the most invoices that remain unpaid three months past their due date.

Whether your business falls into one of these categories or a different one, every business that invoices customers or waits on third party payments (like app developers and merchants selling on Amazon, Zulily, Poshmark and similar platforms) experiences some kind of opportunity cost while waiting to see these on-the-books receivables turn into working capital.

The Opportunity Cost of Slow Business Cash Flow

Yes, sitting around waiting on customers to pay accounts receivable invoices or for third parties to pay out your commissions and sales revenues does have a name: Opportunity cost. It’s the sum total of anything you couldn’t do because you had working capital owing on the books instead of in hand; such as:

  • Waiting to replenish inventories or supplies
  • Limiting marketing and advertising funds
  • Stressing your ability to meet payroll or expenses
  • Precluding you from getting quick-pay discounts from your suppliers or vendors
  • Preventing you from expanding, taking on bigger customers or new orders
  • Watching competitors take advantage of emerging opportunities while you wait on the sidelines

Working capital is opportunity! Let’s talk about some of the ways you can speed up business cash flow so that opportunity cost doesn’t slow your organization down or keep it from growing as quickly as it might have otherwise.

Speed Up Business Cash Flow with 7 Proven Tactics

1. Restrict Customer Payment Terms

So this might seem a bit obvious, but one way to get customers to pay faster is to reduce the number of days customers have to pay. This won’t work in every case and of course doesn’t apply if you wait on payments from platforms like Amazon, Zulily, Poshmark, mobile apps, etc., because the platforms have non-negotiable terms. It could also be perceived negatively in terms of competitive advantage, causing customers to turn to businesses that extend more generous payment terms instead.

2. Factor Receivables

We help speed up business cash flow every day, every time we forward an advance on an invoice factored by one of our clients.  It works like this:

An organization or entrepreneur that sells products or services on terms to customers (or via third party retail or e-commerce platforms) factors – or sells – that invoice to us for a small fee (called a factoring fee). Within 1-2 business days, that organization receives an advance on the invoice (or promised payment) of up to 93 percent.

The invoice can be factored as early as the same day the customer invoice is generated (or the third party platform statement is received), so instead of waiting weeks or months on payment, the organization can completely eliminate opportunity cost and stay focused on growth. This enables organizations and entrepreneurs to:

  • Better align expenses with corresponding revenues
  • Meet payroll and operating expenses more readily
  • Access working capital needed to capitalize on fast-emerging opportunities
  • Increase inventories or supplies to take on more orders or serve larger customers
  • Negotiate fast-pay discounts with suppliers to save money on operating expenses
  • Reinvest in the organization more quickly (operations, staffing, marketing, advertising etc.)

3. Provide More Payment Channels

Waiting on customers to send payments via U.S. Mail can add days or even more than a week onto your wait. By adding more payment channels including online pay capabilities you make it possible for customers to choose the payment method that is most convenient for them. In addition, emailing invoices to customers instead of mailing them by postal service may cut additional days off your wait time.

4. Communicate Frequently

Staying in touch with your customers keeps your business top-of-mind and can passively remind them that they should send payment to you. Nor does communication need to be about the customer’s invoice, although this may be a necessity with slow-paying customers. You can stay top-of-mind with customers by sending occasional email newsletters, updates, special offers or expert advice, thereby adding value to the relationship as well.

5. Think Lean

If you overstock inventories or supplies, then your money could be sitting on the shelf instead of at your disposal. Pay close attention to customer preferences, buying cycles, patterns and seasonal trends to see where you may be tying up working capital on slow-moving products or services.

6. Create a Formal Process

What kind of plan do you have in place to communicate with slow-paying customers? Creating a formal process – almost like an email drip campaign – can remind and encourage customers whose payments are late to bring their account up to date.

7. Extend Quick-Pay Incentives

Giving customers some type of incentive to pay you ahead of schedule may speed up your business cash flow. These incentives need not be quick-pay discounts, although that is a commonly used tactic. If you are going to extend discounts, be sure that to examine how they will affect your organization’s overall profitability. You may find that the fee for factoring invoices is far less than the amount of customer discount it would take to incentivize early payment.

***

Which Came First - The Chicken or the Cash Flow Problems

Which Came First – The Chicken or the Cash Flow Problems

Whether or not you deploy invoice factoring or other financing tools to resolve cash flow problems, drill down to the root of the problem to prevent it from impacting your growth again in the future.

Cause or Effect? Exploring the Relationship of Common Business Challenges and Cash Flow Problems

“Access to capital” is commonly cited among the top cash flow problems for small business owners and startups, in particular. But often low cash flow is a symptom, not the cause.

We just published an article which listed the top ten reasons B2B startups fail – or fail to thrive – during their early years of existence. While “access to working capital” was not specifically listed among the reasons, many of the reasons that these small businesses failed tie back to cash flow problems in some way. So much so that someone on LinkedIn asked why “access to capital” was not on the list:

“Good info to share. I have read several articles that say the #2 reason for failure is the lack of revenue / cash flow / financing.”

Is inadequate cash flow the cause or just the symptom when things are going sideways in a B2B startup or young business? It’s sort of a “which came first, the chicken, or the egg?” type of question. It’s easy to point to lack of working capital or slow cash flow as the problem, when actually, cash flow problems are the result of another issue whose roots lie elsewhere.

Here’s another look at the list we shared, along with an analysis of what symptoms might be present within a business experiencing the same type of challenge, along with steps you can take to address the challenge if you discover it in your organization.

More than Cash Flow Problems: Warning Signs of the Top 10 Challenges that Derail Startups and Small Businesses

Emotional Pricing and No Understanding of Pricing (#1 and #4 on the list)

If goods or services aren’t priced high enough to produce the margins needed for a business to be profitable, it can quickly result in low cash flow. Conversely, if products are priced too high it can result in inadequate volume of sales needed to produce the revenues required to meet operational needs (and result in low cash flow).

You may be able to fix your pricing strategy by conducting some competitive research or establishing a value proposition that resonates with more buyers. You may also need to determine whether there is an adequate number of buyers in your target markets to support a particular product or service; if the market is inadequate, it might be necessary to scrap or table the item for the time being.

Living Too Large (#2 on the list)

Many entrepreneurs become small business owners out of a desire to build a better life for themselves, and it’s understandable that they (or their investors) would want to enjoy the fruit of their labor. Low cash flow can be symptomatic of the removal of too much operating revenue by an owner or investors. This challenge can be addressed through proper financial planning and having controls in place (or the self-discipline required) to ensure that the business retains the revenues it needs for day to day operations and growth initiatives.

Not Paying Taxes and No Experience in Record-Keeping (#3 and #7 on the list)

Many tax preparation professionals have a number of clients who are also sole proprietors and small business owners, and nearly all could probably tell you a story about doing taxes for a small business owner who had failed to set aside money for state or federal taxes. Not paying taxes at all, or not paying enough in taxes is a sure-fire way to hurt a small business.

We have included lack of experience in record-keeping here as well because both non-payment of taxes and poor record keeping are related; and both can find fixes in working with a professional accountant or bookkeeper in order to ensure that the paperwork is done right and taxes are filed and paid on time.

Both can also result in low cash flow; and in particular, as you work through your pricing strategy, it’s important to include projected tax expenses as you calculate margins and set prices for your goods or services.

Lack of Planning (#5 on the list)

Lack of planning can negatively impact any number of areas within a small business. Lack of planning could result in stocking too much or too little inventory. Lack of planning could result in having too many staff on board or not enough personnel. Some small business owners are inherent planners, others are more inclined to be visionaries. Some see the big picture, others the details.

One important thing for any business leader to remember is that it’s rare for any one person to have all the skills, abilities and inclinations needed to do everything that needs to get done in the business – and do it all well. This challenge can be addressed by hiring to your inadequacies, finding good mentors and recognizing where you need help (instead of trying to do everything yourself).

The bottom line: If planning in many or even just one vital area of your business is not your strong suit, don’t be afraid to ask for help.

No Understanding of Financing and Inadequate Borrowing (#6 and #10 on the list)

Meeting with a business finance expert as you launch your organization and as you grow can help to ensure that your finances will be correctly set up and understandable. Clarity in this area can help you identify problems as they emerge, before they hurt your business, and while there is still time to act to resolve them.

Additionally, it’s important for small business owners and entrepreneurs to understand that there are financing alternatives available that can help resolve common cash flow challenges. For instance, we offer business financing programs that can help small businesses with low or slow cash flow, including receivables invoice factoring that allows an organization to “speed up” collection of customer invoices in order to create more consistent cash flow and take on new business more quickly.

Poor Credit Granting Practices (#8 on the list)

As with setting prices, organizations can make the mistake of extending terms that are too generous, thus affecting cash flow because customers take a long time to pay or they can make the mistake of setting customer terms that are not generous enough, so that competitors look more attractive to their customers.

The good news for companies that invoice their customers after delivering goods or performing services is that invoice factoring can alleviate this challenge altogether. When companies factor invoices, they can receive payment on a customer’s invoice the same day the invoice is generated, without waiting for customers to pay.

Expanding Too Fast (#9 on the list)

When organizations try to expand too quickly, they often deplete resources (including working capital) to the point that the business may have trouble meeting operating expenses. This is another instance where simply working with a financial planning expert and creating a manageable, controlled plan for growth can prevent the problem from occurring.

***

Get more information about how invoice factoring can speed up B2B organizational cash flow: