Keep Tight Control of Cash Flow to Improve Profitability
Cash flow issues in a profitable company suggest a timing issue. It could be that you are keeping costs under control and hitting sales targets, but the profit that you see in your accounts never quite seems to materialize in cash. Accounting convention dictates that income must be matched to expenditure. Accounting techniques like prepayments, accruals, and depreciation adjust the timing of costs to match the sales to which they relate. The matching principle provides a true and fair view of a business’s profitability for any given period. However, this accounting treatment also explains why the profit and loss account is not always representative of the cash position. Cutting costs may not be necessary to address a persistent cash flow problem in a profitable company. You may, instead, need to fix the cash flow timing issue. In other words, you need to match the cash outgoings more closely to the cash income. Here are ten ways to address a cash flow timing problem and retain more cash in your business.
1. Reduce Customer Days to Pay
Every day of credit you offer your customers is one day longer your cash is in someone else’s bank account. In the meantime, it is quite likely that you have already paid out money to supply credit customers with products or services. So, step one towards getting more cash in your bank account is to look at ways to reduce the average number of days that customers take to pay your sales invoices. You might need to tighten up credit control procedures, or you could reduce your standard payment terms. Or you could consider invoice factoring, which is another way to speed up the payment of sales invoices.
2. Require Deposits on Large Orders
When you review your sales terms, you might want to consider requiring on deposits with large orders. If you think that asking for down payments may damage sales, consider offering price incentives in return for down payments. Even a small percentage of your sales invoices paid up-front will help to reduce the timing difference between buying products and receiving cash from their sale.
3. Extend Vendor Credit
You can further close the gap between receiving cash from customers and paying suppliers by renegotiating terms with vendors. Negotiating revised payment terms is far preferable to stringing vendors along with excuses for late payments. So, talk to suppliers about extended payment terms, or look for better deals from alternative vendors. In many cases, you will find that suppliers are far more accommodating than you may have thought.
4. Adopt Just-In-Time Purchasing Policy
Look at your inventory levels with a view to reducing how much cash you have tied up in stock. Consider buying items just in time, rather than placing large bulk orders to last you months at a time. Ordering smaller quantities of stock may mean paying slightly higher unit prices. But the extra cost may be mitigated by the easing of pressure on cash.
5. Migrate Systems to The Cloud
Cloud-based software solutions offer many benefits, including reducing software maintenance, easy remote access, and scalability. The other significant advantage of cloud-based solutions is that you don’t need to buy the software. Most cloud applications are based on the software-as-a-service (SaaS) model. You pay a monthly fee rather than having to buy the software outright. The same type of pay-as-you-go model is available for cloud-based virtual server solutions. Migrating your systems to the cloud will replace the one-off sizeable software and hardware purchases with more manageable monthly fees.
6. Consider Outsourcing
The freelancer market is booming. Indeed, you can now hire freelancers for all kinds of tasks, from bookkeeping to web design. One advantage that outsourcing has over hiring is that you only pay for what you need when you need it. You can’t, for example, send your full-time bookkeeper home without pay if they have no work, and it would be tricky hiring a personal assistant as an employee for only a few days. So, outsourcing will help you reduce costs and match the timing of labor costs to income.
7. Lease Instead of Buy
Purchasing fixed assets creates a significant one-off drain on cash. However, leasing spreads the cash outlay over the useful life of assets. You may also be able to get a one-off cash injection by arranging a sale and leaseback deal with a finance company on existing assets. Leasing will, of course, involve interest and other charges. However, the benefits you gain from having the extra cash may outweigh the cost of this course of action.
8. Implement Robust Purchase Controls
Your efforts to maintain more cash in the business will be in vain if purchasing is not kept under control. So, draft a document that lays down the procedure for placing purchase orders with vendors. And set purchase authorization limits for employees. When you select new suppliers, negotiating credit terms should be as crucial to the buying decision as price. So, include minimum payment terms in your purchasing control procedures.
9. Monitor Cash Flow
Being agile with your cash flow management will help you retain more cash in the business. The cash position of a company will change from one day to the next. So, monitoring cash flow weekly or even daily will help you balance cash outgoings with sales receipts. Maintain both a long-term and a short-term cash flow forecast. The short-term cash flow forecast will help you manage the day-to-day cash flow. The long-term forecast is likely to be less accurate. Still, it will help you plan for any significant outgoings that are on the horizon.
10. Set Up a Business Reserve Account
Finally, to retain cash in the business, it would be best to put some money aside every month in a separate reserve bank account. Once you have built up a reserve, you will have a float of cash you can use in emergencies. Try to avoid using the cash reserve as much as possible, though. Look at ways to delay some payments when money is tight rather than dipping into your emergency fund.
The Bottom Line
To sum up, if your business is profitable, but you are experiencing cash flow problems, you must adjust the timing of payments to match receipts. Try to get to a position where your credit terms are less favorable than those of your suppliers. Consider financing options such as invoice factoring and leasing. And keep tight control of cash flow and purchasing. Some of the options mentioned above might increase some costs slightly. But the effect of those increased costs could be outweighed by the savings you could make when you have more flexibility in your cash flow.
About Universal Funding
Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.