Small and midsize companies often need to find new ways to generate cash – and for a variety of reasons. One common reason: they may find themselves in a potentially dangerous cycle where they have orders for which they’ll ultimately be paid, yet they’re struggling to cover the cost of the materials and labor needed to fill those orders.
Thankfully, there are many possible solutions to improving a company’s cash flow. Here are five often-overlooked strategies to consider:
1. Motivate customers to pay quickly – or even upfront
According to Gail Lieberman, managing partner with Rudder Capital, a corporate advisory firm, companies should consider ways to get paid by customers faster or even in advance of providing them goods or services. -. One common strategy for achieving this is by providing a discount for customers who pay early. For example, you might give a 2% discount from the invoice amount if the customer pays in 10 days, while a customer who pays after 10 days, but within 30 days, will pay the full amount stated on the invoice – what’s often referred to as 2/10, net 30. Offering a discount means shaving margin, Lieberman explains. “But earning a profit may be a lesser goal than surviving” when cash is short, she adds. A variation of this is to request regular partial payments for work that will be completed over time.
Similarly, make sure your overall invoicing process motivates customers to pay quickly, advises Allison Flexer, manager in Grant Thornton’s financial management practice. It’s not unusual to uncover bottlenecks, such as a cumbersome approval process, and missteps that lead to invoice errors – both of which can cause delays in payment.
2. Ask suppliers for more flexible payment terms
Another option is to ask suppliers to extend better payment terms to help you avoid a cash crunch. For example, a supplier may agree to allow your company to pay in installments over a longer period rather than paying the entire amount at once. “Or, you can try to negotiate more extended payment terms,” Flexer says. For instance, rather than paying within 30 days, you can ask about paying within 45 days.
3. Evaluate your spending and identify ways to trim it
Even small cuts can free up cash. Lieberman worked with a midsize ad agency in which many employees traveled and rented cars. The company had negotiated an umbrella insurance policy to cover the rentals, so management advised employees not to accept the insurance offered by car rental companies. Many still did. “It’s a leaky faucet type of expense,” she says. That means money is going into the business without benefiting the company.
Also watch inventory levels. Allowing goods to languish on a backroom shelf “is like putting cash in a closet,” says Dennis Ceru, adjunct professor of entrepreneurship at Babson College. Calculate how much inventory you realistically need to cover anticipated sales and aim to hold about that much.
4. Find loans and grants available through state and local agencies
Rather than focus on payment terms or operations, a company might instead look for outside sources of cash. Grants and financing offered by local or state economic development agencies are options often overlooked by businesses, Ceru suggests. The City of Cleveland, for example, offers long-term, fixed-rate financing to businesses that can’t access traditional bank financing. Since local economic development agencies often have their own lending criteria, businesses that are ineligible for bank or credit union loans may qualify.
The economic development agencies in your local area or state likely have a website, and that may show current financing or grant opportunities. You can also call them directly to inquire.
5. Consider asset-based financing
As the term suggests, this form of financing is secured by the assets of your business, such as accounts receivable, inventory, or equipment. One version is factoring, in which a business sells the right to collect on an invoice to a financing company (“the factor”). The factor advances a portion of the invoice total, such as 70% to 75%, and forwards the remainder, less its discount, when the customer pays the bill.
A word of caution: asset-based financing can be expensive. A 4% discount on an invoice that’s paid in 90 days equates to an annualized rate of about 16%; that increases to 17.18% if interest is compounded monthly. “They can be onerous terms,” Lieberman says. On the other hand, if it’s the only source of financing available, a business may need to consider it, she notes.
The phrase “cash is king” has become a cliché for a reason. No business can survive for long without it. Fortunately, most businesses can take steps to identify sources of cash and free up their own cash flow.
