One of the biggest problems facing small to medium sized businesses is the issue of cash flow. Every business must pay its vendors and creditors, pay its employees, and hope that its customers pay them on time to make these payments. It’s not easy, and many businesses struggle with cash flow on a daily basis. It’s a reality of today’s business. However, is there something that small businesses can do to improve their cash flow?
Small businesses have two outlets to improve their cash flow. First, they have their customers, and second, they have their vendors. So, how can both improve cash flow? Well, in the case of customers, would getting them to pay sooner, improve cash flow? Certainly it would! In the case of vendors if they extended a business longer credit terms, or even discounts on prompt payment initiatives, would these improve cash flow? Surprisingly, both would. While it may seem strange to bring up prompt payments when discussing cash flow issues, many companies still pursue discounts on prepayments with their vendors even though they can’t make those prepayments right away. They do this to plan for the future. In those cases when cash flow is no longer a concern, that discount for prompt payment can provide significant savings. So, how does each of these by themselves improve cash flow?
Which Customers are able to Pay Sooner?
For a number of businesses, the easiest customers to get prompt payments from are typically those customers that can’t get any credit. Companies use these customers to promote dead stock or obsolete stock at discounts in order to incentivize them to prepay. When a company does a credit check on these businesses, it’s more than likely that nobody would extend them credit. By promoting dead stock, or obsolete stock, a company can not only get paid faster, but alleviate a huge impact on their daily cost of money by selling inventory that might otherwise not be sold. Inventory costs money, and by selling dead stock to customers that are not credit worthy, a businesses can get immediate payment and alleviate their inventory holdings.
Can Extended Terms With Vendors Improve Cash Flow?
By negotiating extended terms of credit with vendors, a company can extend the period they must pay their invoices. Ideally, getting 45 to 60 day terms with vendors allows a business to extend the period they must pay their vendors, and preserves important cash reserves for other payments and payroll. While negotiating these terms isn’t easy, the point is not to worry about getting extended terms with all vendors. Getting extended terms with a company’s largest vendors is a realistic goal, especially if those vendors value and appreciate the business. Since the largest invoices require the most money, getting extended terms has a tremendous impact on cash flow.
Can Prompt Payment Initiatives With Vendors Improve Cash Flow?
Perhaps the most ignored way to improve cash flow is to prepay vendor invoices when possible. Sound confusing? Well, it really does make sense. By negotiating a 1% net 10 or net 15 payment incentive, a company can set the stage for future savings, and capitalize on this discount by making prepayments when possible. For some businesses, cash flow is a seasonal or temporary issue. For those periods where cash flow isn’t a concern, making a prompt payment with a vendor willing to provide a discount, makes a huge impact in the long run. In this case, consider it a deposit. Saving money improves cash flow because it provides the business with more money in its pocket. Whether that money is saved now or later, it’s still a savings.
Small changes here and there can make a significant impact on a company’s cash flow. It takes a willingness to sell to those less than credit worthy customers, and the kind of vendors that see the business relationship as more of a partnership. By working both ends of the spectrum, a company can significantly improve their cash flow. It takes time, but eventually all of these approaches will pay off. Cash flow issues are not always a concern, and it is incumbent upon businesses to take advantage of vendor discounts when possible.