By Jansen Harper
Cash flow is one of the most important metrics of business success—as vital as profitability. It refers to the flow of money in and out of your bank account—the cash you bring in, versus the funds you disburse to settle your bills and expenses. You can generate high revenues and be profitable on paper, yet still run out of money without good cash flow management.
Slow payment from corporate and government customers is a major reason for cash flow challenges for small and medium businesses (SMBs) in the technology channel. The result is that many of them depend on expensive overdrafts and credit cards to run their businesses. Here are some ideas about how resellers can sharpen cash flow management and avoid liquidity gaps.
1. Build relationships with service providers, suppliers and customers
2. Understand the power of a cash discount
3. Run regular cash flow forecasts
4. Think about financing options
5. Consider cash flow when deciding which opportunities to pursue
Strong business relationships will go a long way in helping you to manage cash flow in your business. If you have a transparent and collaborative relationship with your creditors, they will be more willing to be lenient if you need a few more days to pay due to a cash crunch. Likewise, an open relationship with your customers means you’ll have more visibility into potential delays in payment.
Nearly all B2B SMBs face the challenge of closing the gap between paying their suppliers and service providers and getting payment from their customers. Large customers will often use their market power to demand generous 60-day payment periods from smaller providers. But if your business is small or new, creditors may demand cash on demand or payment in 30 days. Consider offering customers a cash discount for settling on delivery or for paying upfront. And use your creditors’ terms to your advantage. If there is a discount for early payment, use it. If not, settle your bills according to your vendor’s terms of payment—no sooner, no later. This will help you to cycle cash optimally.
Producing regular cash flow forecasts should be a regular part of your admin routine. Most good accounting software solutions will make it easy for you to generate cash flow forecasts for 60 days or 90 days. This will help you to understand the flows of money in and out of your business, including periodic payments like VAT and income tax. This helps you to anticipate and plan for any liquidity gaps.
Periodic liquidity crunches are by no means unusual for SMBs. But when they do happen, you want to be ready for them, so that you can still pay the most important accounts on time. For a new business, it’s particularly key to establish a reputation for being a timely, reliable payer. As such, it can be helpful to have financing lines ready if you need them. In addition to credit from suppliers or bank overdrafts, credit cards or loans, some SMBs use options like invoice factoring.
It’s wise to carefully consider profit margins and cash flow implications when choosing which deals and customers to pursue. Deals with a large top-line number are always exciting and tempting to chase. But if they tie up your finite resources for six months before you get paid, they might not be worth it. That’s especially the case if you need to take loans or turn away cash deals to fulfil the contract.
It’s not unusual for SMBs to run into liquidity challenges. In these volatile times, it’s often because of factors beyond your control, such as slow payments by customers. Yet, tight administrative processes and good business relationships can help you manage gaps between receiving and paying cash, so that you don’t run into a cash crunch.
Reference:
https://en.wikipedia.org/wiki/Factoring_(finance)