If you’re a sole proprietor or in a partnership with one other business owner then improving cash flow may not be huge concern for you. Chances are when cash is in hand you pay yourself. You likely don’t have an office lease to worry about, you don’t have employees that require set payroll schedules, and if you’re a business providing a service instead of a product, you likely don’t have inventory concerns.
While (business) life may seem rosy in that scenario, improving cash flow can be crucial if you’re a business owner with employees, provide or manufacture a product, or require capital equipment to run your business. Under this scenario, while growth may seem palpable, it can also lead to trouble.
Let me paint a scenario for you… We have a small business owner. He sells a product. He has the building, the employees, suppliers, and customers and cash flow is fine. Like many small business owners, at a certain size, they have it figured out. They have a nice cash flow, they have current clients paying net 30 terms and they themselves are paying suppliers with net 30 terms. Payroll is under control and inventory is manageable. All is well!
Suddenly our small business owner lands a big new account and he thinks he’s hit the big time; business will soar. And on paper it looks great! The problem? This new customer demands net 45 payment terms, his suppliers are holding fast at net 30 terms, and he needs to hire more employees that all will need to be paid weekly. On top of this, to house the new inventory requirements needed to meet new client demands, he’ll need to lease new space.
You get the idea. Growth sounds great but comes with inherent headaches that only improved cash flow (or a rich aunt) can solve. So what can our small business owner do? Here are 6 ways he can improve cash flow:
- He can source new suppliers. While these suppliers may be demanding net 30 terms they still want his business. He can look for alternative options (they’re out there) and then use his options as leverage to negotiate better terms.
- He can work with suppliers to set up just-in-time inventory. Just-in-time inventory means that our business owner will have less inventory on hand at any given time, but receive more shipments. In this scenario, he may not need additional space to house his inventory since it sits in storage for much less time.
- Depending on his relationship with his customers, our small business owner could adjust his up front requirements, asking customers for an initial deposit prior to work beginning. He’ll need flexibility here but he may likely find that his long term customers value his business and relationship more than he thinks.
- Introduce discounts on his invoices. Many companies provide incentives for early payment and they aren’t often huge, but can add up to savings for all parties. For example… 1% 10, net 45 payment terms gives the customer the change to save 1% on the total invoice by paying in 10 days instead of 45. While our small business owner may sacrifice 1% of his revenue, that rate is a lot lower than if he was to borrow cash.
- Introduce credit card payment options. In this scenario, he will have to pay a discount to a credit card company – often 1.5 to 3% – but this is typically lower than borrowing cash as well, and the customer can still often realize his payment terms with the float he’s given with the credit card company.
- Consider invoice factoring. With invoice factoring, he sells his invoice to a factoring company that handles collections (taking that task of his plate). He gets his money quickly – usually in a day or so.
- Or consider a Working Capital Advance. A Working Capital Advance is similar to factoring, except that he gets an advance beforehe even completes his work. This option is great for B2B or B2C companies that accept credit cards and generate receipts.
Employing all or some of these cash flow solutions, our small business owner is poised to take advantage of growth opportunities and the added headaches they can cause. Growth can be good, but don’t be blindsided!