Most companies occasionally experience cash flow shortages. This article will explain how to address this common problem and will also suggest strategies to solve it. Please note that this article is not meant to replace the advice of a qualified professional. If your company is experiencing serious cash flow problems, you should consider contacting a financial specialist immediately since cash flow difficulties can be serious and seldom resolve on their own.
The most common cash flow problem occurs because customers exceed their credit terms and take longer to pay. Companies routinely give customers 30 days to pay their bills, but due to economic conditions, some clients may stretch their payment terms to 60 days. If a company has to wait almost two months to receive payment for invoices, it needs to find funds to meet current expenses. Usually, these payments are generated from reserves which are replenished by paid invoices. Problems start when reserves dwindle as expenses mount.
Two ways exist to protect reserves. One approach is to delay the company’s expenses until they match the payment cycle of the business’s customers. The other is to attempt to accelerate customer payments. Ideally, both approaches should be taken to achieve the most optimal solution.
The most common way to delay expenses is to contact vendors and ask for extended terms. If your company has been a loyal and timely payer, your request should be granted. However, if you do renegotiate payment terms, assure that all future payments are made on time. Do not risk your vendor relationship or you may be forced to pay COD for your goods or look elsewhere for new vendors. Avoid missing payroll and payroll taxes. If these situations are imminent, seek the help of a qualified advisor.
There are two easy ways to accelerate the payment of invoices. Offer customers a discount to pay quickly. The “2%/10″ is an industry standard that allows customers to take a 2% discount if they pay an invoice within 10 days. If this approach is not sufficient to solve a cash flow shortage, consider the process of factoring. Invoice factoring accelerates your revenues by using a financial intermediary to advance funds against outstanding invoices. The factoring company quickly sends you a large percentage of an outstanding invoice and settles the transaction with your company once the customer has paid in full. The factoring fee is based on volume, credit quality, and invoice age among other variables.
Factoring is easier to obtain than conventional business receivable financing, but it is more costly. It is important that your company has quality receivables from credit worthy customers. Factoring can work well if a company has small cash reserves but large receivables, again from high quality customers.
Most cash flow shortages require a comprehensive strategy to manage both income and expenses to ensure liquidity. Factoring is a good tool which can help accomplish this goal.
