What can you as a business owner do to address the issue of cash flow? Surprisingly, there are some simple approaches that can improve your cash position. It starts by understanding that some customers must pay in advance, regardless of the price you offer them or their history in the market. Yes, prepaid customers are one solution to better managing cash flow, but they aren't the only solution. So, what are some of the more simple ways to improve your company's cash position?
Lowering Your Cost of Capital
A number of small companies seem to shy away from dealing with prepaid customers. For whatever reason, they tend to see them as not viable long-term business opportunities. However, these less than credit worthy customers not only represent the best opportunities to improve cash flow, but they also help to reduce the daily cost of money and they make it easier to ride the ups and downs of your business cycles. The key is to take the time to sell to these prepaid accounts and use their immediate cash to offset times where cash is tight.
It’s pretty much guaranteed that if these customers can’t get credit with your business, they likely can’t get credit anywhere. Because of this, these customers are extremely loyal. In a sense, they don't have much choice. After all, they're pretty much ignored by most of their vendors and creditors. So, how can these prepaid customers, with bad credit, be such a great opportunity for your business? Well, here are some points to consider when looking at these prepaid customer accounts.
Learn more about your costs of capital.
1. Poor Credit Means Nobody Concentrates on These Customers
It’s pretty much guaranteed that these customers aren’t anyone’s priority. They are used to being rejected, or pushed away. Therefore, your company can help fill a void and service these accounts with minimal impact from your competition. These customers are looking for someone to service them, and your company can close easy sales with these customers.
3. Poor Credit Means Higher Gross Profit
Consider for a moment what happens with your customers who have credit. They likely have 30 days to pay invoices. As mentioned, every day your business isn’t paid, is another cost of money, and can be argued, is a hit on the gross profit of your sale. So, having a customer who pays upfront, means your gross profit on the sale is higher. It can be argued that this point, and the one above, are one and the same.
4. Negotiate Discounts for Prompt Payments With Vendors
Now, this might seem a little odd, but make sure to negotiate prompt payment discounts with your vendors and creditors. If your vendor relationships are strong, this should be easy. You likely won’t be able to do this all the time, but when cash flow isn’t an issue, make sure to benefit from those prompt payment discounts by paying off invoices when you can. Try and get a 1% or 2% net-10 day or prepaid terms.
If cash flow is a cyclical and seasonal problem for your business, then you should have periods where you have more cash available that at other times. Savings, regardless of when, are still considered savings. So, take advantage of these discounts by saving money when you can. This reduces the daily cost of money, and improves your cash reserves, as saving money, means more money for other things your business needs.
5. Have Step Commission Scales for Sales Representatives
Paying one commission percentage, regardless of how much is sold, or what’s sold, is no way to incentivize sales. A great way to improve cash flow, save money, and grow your business, is to use a sliding commission scale on the amount of sales, or types of products sold, by your company’s sales representatives. By using a sliding scale, it ensures that any additional sales generated earn a higher commission for the sales representative, and any lower sales amounts don’t cost your business too much money.
Find those products that have a high probability of sales, and make sure to offer a lower commission on the sale of those products. This is a tricky subject, so tread carefully. Sales people are notorious for protecting their sales commissions, and rightly so. However, if you take the time to play out your argument, it should be recognized that those products that sell themselves, shouldn’t have the highest commission structure.
Adopting each of these approaches should help alleviate those issues with cash flow. Make sure to approach those less than credit worthy accounts, and negotiate those prompt payment terms with your vendors and creditors, it will help put money in your pocket. Improving cash flow is all about saving money.
Whether this means saving money by paying your company's own invoices early, (when cash flow isn't a concern) or incentivizing customers to pay sooner, both approaches work extremely well. To improve cash flow means your company will have more money for its day to day operating expenses.
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