Tips to improve cash flow

As a trustee and lawyer, I regularly see companies in trouble or - worse - even declared bankruptcy because they cannot meet their current obligations. This is often caused by a cash flow problem, meaning that the inflow and outflow of money is not in order. Cash flow can be thought of as "the lifeblood" of a business. When the blood stops flowing or when a vein clogs, there can be dangerous consequences.

A cash flow problem can occur in bad times (for example, due to the bankruptcy of a customer which, in turn, causes the customer not to pay the bill), but also in good times when a business is growing (for example, because more pre-financing is being done).

This is a waste because the money is often there, but not at that time. Moreover, it is unnecessary because by following a few simple tips, a company can easily improve its cash flow.

Tip 1: Implementing an efficient accounts receivable policy

Cash flow can be significantly improved by requesting payment from customers in advance, requesting payment directly when purchasing a product or service or requesting an advance payment. In this way, no receivables (which, moreover, are uncertain to be paid) are created.

If this is not possible for commercial reasons or because it is not customary in the industry, then short payment terms or term invoices can be used where small amounts are invoiced regularly.

In addition, experience shows that a sharp accounts receivable policy pays off. This means immediate invoicing whenever possible, a clear invoice, sharp monitoring of deadlines, sending immediate reminders and calling after them and taking immediately announced follow-up steps.

Tip 2: Implementing an efficient accounts payable policy

The mirror side of an efficient accounts receivable policy is an efficient accounts payable policy. Agreeing longer payment terms with creditors, negotiating discounts, and/or paying invoices on the last day allowed significantly improves cash flow.

Tip 3: Working with factoring or leasing

A business does not have to buy or pre-finance everything. There are alternatives to that such as factoring and leasing.

Factoring is an umbrella term for several services that all have in common that a so-called factoring company collects the business owner 's receivables from its customers and pays a fee (directly) to the business owner. In factoring, therefore, the receivables from customers or debtors are financed and cash flow improves.

In leasing, receivables are not financed, but (as a rule) operating assets or vehicles: a lessor gives an object in use to the lessee for a certain period, for which the lessee pays a fee to the lessor. This also improves cash flow and allows the money released to be used for other things.

Tip 4: Keeping a small(er) inventory

With an unnecessarily large inventory, money is stuck in the stock. That's a waste. Keeping a small(er) inventory frees up money for other things. Keeping a small(er) inventory can be accomplished by working with an efficient inventory management system, for example.

Another option is to work only on an order basis. This avoids keeping inventory (for the most part) and improves cash flow.

Tip 5: Limiting pre-financing of work in progress

In construction in particular, work in progress is almost always pre-financed. A long period of time often passes before materials purchased from suppliers are reimbursed by the client through the contract price.

The resulting cash flow deficit can be avoided by agreeing with the client that the purchase of materials may be billed directly at the time of delivery to the construction project site.

Alternatively, the client may purchase the material directly himself. Then the opportunity for margin on the material may evaporate, but that margin may be less than the interest paid to the bank to enable pre-financing.

Conclusion

Proactively managing a company's cash flow is one of the most important things a business owner must do both in good times and bad. If a cash flow problem occurs, it often poses an acute danger to the company by making it unable to meet its obligations. A cash flow problem can often be prevented or remedied relatively easily by taking the measures described in this article.