Unlocking the cash in your business
If your business is short of cash, the money you need might already be there locked up in stock, assets or your debtors’ book. Take a close look at these three areas to free up funds from within your business.
1. Sell, manage or convert assets to cash
Your assets include debtors, stock, pre-paid expenses, vehicles, plant and equipment, fittings and property. Each of these is a possible source of funds.
Everyone that is a late payer and owes you money is cash waiting to be collected.
Here’s how to get your cash in sooner:
- Get invoices out promptly. This is your future cash flow and you need to receive it as soon as possible. Slow invoicing means delayed payment. Don’t let invoicing work accumulate until the end of the month. Invoice immediately you ship or send goods or complete a task
- Accept relevant mobile payments. This will speed up the payment cycle
- Email your invoices rather than post. It’s faster, saves printing and postage, and gets your invoice into customer’s payment cycle earlier
- Don’t send statements. Many businesses cut out the extra step of sending statements simply by printing at the bottom of the invoice: Please pay on this invoice as no statement will be sent. Can you do this in your business?
- Change the terms for some of your customers, or for new customers. Can you reduce your payments terms from 30 days to 7 days from date of invoice? What about payment on delivery?
- Always follow up promptly and consistently when invoices aren’t paid by due date. Be polite but firm. If you haven’t the time to do this yourself, then appoint someone to do it for you
- Credit check new customers. If you haven’t been doing this, now is a good time to start. Credit checking can eliminate bad debt problems right at the start. Make sure new customers sign acceptance of your credit terms
- Consider offering a prompt payment discount. Try offering a discount to your customers if they pay early. Discounts can be an option for high-margin operations. You have to work out whether the use of money gained earlier is worth the discount you’re offering.
Do you have excessive capital tied up in stock? This can occur in two ways:
- You’re carrying high levels of items that you could obtain from suppliers at short notice
- You have too many slow-moving stock items (and too few fast-moving items).
Better management will reduce both problems and free up cash.
- Review stock levels. Regularly review your stock levels, your stock turnover rates and your purchasing policies to see if you can hold less stock without impacting the business
- Hold a sale. It might pay you to reduce old stock to get money in quickly
- If you need additional funds to purchase more stock, make sure that you’re replacing slow-moving stock with the faster selling lines.
Fixed assets can often lock up significant amount of cash. Do you really put all your assets to full use? Can you sell off little-used assets and hire the equipment when it’s needed? Can you lease vehicles instead of buying them?
2. Collect from customers earlier
Don’t forget your customers can be a source of business funds. Apart from improving your debt collection tactics as discussed, try these tactics:
- Pay by credit card. Ask some of your credit customers if they would be willing pay you by using their business credit card. You must pay a credit transaction commission, but you get your cash straight away to use in your business
- Ask for cash. If it’s relevant for your industry, consider encouraging customers to pay with cash to keep the funds inside your business rather than locked up in accounts receivable
- Get progress payments. If you supply goods or services over a period, try to secure progress payments. This ensures you get some cash flow during a project instead of waiting until the end of a project or delivery period to invoice—and then still waiting at least another 30 days for payment. There’s another benefit here too. If the business you’re dealing with fails, you at least have got payment for work you’ve completed.
3. Hold suppliers accountable
Finally, consider your suppliers as a possible source of fund:
- Take back surplus stock. Will they take back some stock if you find you’ve ordered too much for current trading conditions? They might help you out of a temporary tight corner if you explain you have a temporary cash flow crisis
- Extended credit. Try asking for extended payment terms to give you the opportunity to sell the goods first before you must pay
- Split the order. Try asking the supplier to split the order in two and offer to pay normal credit terms on the one half of the order and 90 days or longer on the other half.
Your suppliers will be more likely to agree to these arrangements if you’ve paid them promptly in the past. It’s always good policy to keep on good terms with key suppliers; they will be more likely to help you when times are tough.