Most small businesses experience cash-flow problems from time to time and urgently need working capital. Many owners immediately think of the bank when money is short, but there are other resources to tap before you ask for an expensive overdraft. The money you need might already be there – locked up in inventory, assets or your debtors’ book. Re-examining your business systems can free up funds, and often that’s enough for your immediate needs. Even when it isn’t, the effort helps ensure you’re running the business efficiently. Look closely at three areas: assets, customers and suppliers.
Debtors
Are you letting some customers use your money for months? Your business isn’t a free bank. Get invoices out promptly – this is your future cash flow, the lifeblood of your business. Send the invoice with the goods or as soon as the service is completed, and date it from the day it’s sent rather than the last day of the month. Change terms for some customers to shorter periods (7 or 14 days), and follow up politely but firmly the moment an invoice is overdue. Monitor your debtor-collection days and set an improvement target each quarter against your industry benchmark – if the average is 30 days and you’re taking 45, there’s clearly room to improve.
You could also consider factoring (selling outstanding invoices to a finance company for most of the money up front), but check their collection methods first so they don’t antagonise your customers. Alternatively, offer a discount for prompt payment – suitable for high-margin businesses – but never honour the discount once the due date has passed.
Inventory
Do you have too much capital tied up in stock – carrying high levels of items you could get from suppliers at short notice, or too many slow movers? Review your stock levels, turnover rates and purchasing policies regularly. Free up money by reducing stock, moving out slow lines, or running a quick sale of dust-collecting items. You can even ask suppliers to take back excess stock as a goodwill gesture if you explain it’s a temporary cash-flow issue and you want a long-term relationship. If you need funds to buy more stock, make sure you’re replacing slow movers with faster-selling lines.
Pre-paid expenses and assets
Look at expenses you pay in one hit – insurance, for example – and ask whether you can spread them into smaller monthly amounts your cash flow can handle more comfortably; try the same with your accountant. Assets can also drain cash: consider selling little-used assets and hiring replacements when needed, or leasing rapidly depreciating equipment such as computers and vehicles.
Customers and suppliers
Customers can be a source of funds too. Some credit customers may be willing to pay by business credit card instead of on account – they keep their interest-free days while you get your cash almost immediately (less a small commission). If you supply over a period, or run a service business, ask for progress payments so you get cash flow during a project rather than waiting until the end – with the bonus that you’ll spot a dodgy customer early. Finally, ask suppliers for extended payment terms so you can sell goods before paying; if they won’t budge, offer to pay 30 days on half the order and 90 days on the other half. Suppliers are more likely to agree if you’ve paid promptly before – after all, they have a vested interest in your success. And always take up early-payment discounts when they’re offered.