Poor cash flow management; it is the Achilles heel for many small businesses. It is always hard when your customers pay late, but if you effectively manage your cash flow, late payment shouldn’t mean disaster. It pays to be prepared!
Let’s face it; there is a lot to think about when starting a new business. It is common business practice to take on long, and short-term debt to help finance operating expenses, especially as you start out and as you begin to grow. This debt needs to be managed and utilized in a way that will encourage success, not bog you down in the debt mire. It certainly feels great when you realize your company has grown enough that you can balance your accounts payable with your accounts receivable. But then it is time to grow again and this is when cash flow management becomes even more critical.
Using a manufacturing company as an example, we know that in order to grow, you have to maintain a steady supply of goods to your existing customers. Growth means increasing sales, and also increasing manufacturing capacity in order to supply your potential new customers. This costs money; so make sure you have a strong cash flow management plan in place so that you can effectively sustain growth. There are some challenges you may face which may impact your cash flow:
- It may be necessary to offer credit terms to new customers, which delays payment anywhere between 30 – 90 days.
- During a growth period, especially if you are a new business, many vendors may not be willing to offer similar payment terms to those you are offering your customers, causing a cash flow dilemma. You have to pay your vendor but you have not yet received payment from your customer.
- Using the manufacturing business as an example once more, you will need to increase your inventory of raw materials to make sure you have enough to manufacture goods for your new and existing customers. This means your finished goods inventory needs to increase to make sure you have a regular supply to all of your customers. Which means finding cash to pay for increased inventory. This increased amount of inventory may also sit on the shelf for a while, which will also cost you money.
Careful cash flow management, combined with cash flow forecasting, will give you the parameters from which you can operate. It is vital to monitor the age of your accounts receivable, encourage prompt payment from your customers, and work effectively with your vendors to get better payment terms from them. It is always worth considering an alternative method of managing long payment cycles, such as accounts receivable factoring, to help reduce higher interest expenses incurred from the discrepancy between invoice and vendor payment. It is worth considering utilizing cash flow best practices also.
Bay View Funding offers invoice factoring financing options that work with your specific requirements. Factoring enables you to maintain a healthy cash flow by receiving an advance on your outstanding accounts receivable now. Call us today to find out more about Bay View Funding products and services.