One of the biggest problems small businesses face is the issue of cash flow. Often, the business has plenty of work, plenty of customers, but a lag between when they get paid and when they can pay their suppliers. Throw in the fact that businesses must meet payroll, and it can be a very frustrating situation.
The problems can become two-fold, not getting paid fast enough from their own customers and not paying their suppliers fast enough. Not paying invoices on time can impact a businesses credit rating. So, with all these issues facing small and medium sized businesses, are there some simple but effective ways to improve cash flow? In fact, yes there is!
Pursuing Those Less Than Desirable Customers
You may have avoided those credit risk customers because of an inability to provide them with terms. That’s perfectly understandable. However, undesirable customers are perfect for addressing your cash flow problems. While you may not be able to provide them credit, it’s more than likely nobody else has either. If you’ve done your homework and have checked their Dunn & Bradstreet (D&B) Report, you’ve probably seen them as a high credit risk. If that’s the case, others have as well.
So, how can these customers help you improve your cash flow? Pursue them on prepaid terms only, and don’t accept a “company” check. Insist on certified checks and wire transfers from overseas customers, or customers outside your country. These “risky” customers are excellent to sell to. First of all, they eliminate the daily cost of money and secondly, they offer immediate payment for products. Cash up front is excellent business – regardless of the type of customer you’re dealing with.
Asking for Extended Terms or Discounts From Your Largest Suppliers
In improving your cash flow, burning both ends of the candle works tremendously well. If you’ve been able to successfully sell to some prepaid customers, you must now try and extend your terms or get a discount from your largest suppliers. However, make sure you approach the situation this way. Ask first for the extended terms – 45 or 60 days. If they refuse, then ask for discounts on pricing. Get one of these two or both if possible, but your first approach is to get the extended terms.
If your vendor says no, then negotiate the better pricing. If you get that, ask for a further discount for prompt payment – yes, I know you can’t prepay, but at those times when your cash flow isn’t a problem, prepaying and getting a 1% discount is a solid savings. You may not be able to do this right away, but you want to establish an agreement for the future. Here are the steps – do them in order.
These three steps, used together, can make a huge difference when it comes to addressing issues with cash flow. True, you likely can’t prepay right now, but you might be able to later, and when you can, make sure to take advantage – consider it a deposit! Be sure to use both these approaches listed above to improve your company's cash flow.
Learn more about your cost of capital and its impact on your bottom line.
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