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Cash Flow Problems and Solutions for Startups and Small Businesses (3rd of 3 parts)

This is the last of three parts about cash flow problems and solutions for small businesses. In Parts 1 and Part 2, we discussed seven preventive strategies for all businesses: 1.) Get accounting books organized. 2.) Use a cash-flow budget. 3.) Get customers to pay quickly. 4.) Rein-in unnecessary spending and stay alert to potential pitfalls. 5.) Stretch out payables. 6.) Manage inventory properly.

Now we offer some financing and non-financing solutions for cash flow.

A) Some of the Financing Solutions for Cash-flow Problems

Invoice Factoring

Slow-paying invoices are a common cause for cash flow problems. If small companies need to be paid sooner than 30-90 day payment terms extended to their customers, one solution is to use invoice factoring to finance slow-paying invoices. Factoring is where a financial institution lends a business short-term cash that is secured against the value of the invoices, at a small fee, so the small business does not need to wait the 30-90 days.

Accounts-receivable (AR) Financing

Similar to factoring, accounts receivable financing (AR) financing is also based on unpaid invoices, but it works like a line of credit.

Purchase order (PO) Financing

PO financing can fund 100% of the costs to supply your purchase orders including delivery. It is an advance that pays suppliers directly for goods.

Inventory Financing

Inventory financing allows businesses to use inventory as collateral to obtain a revolving line of credit, to get through cash flow difficulties.

Debt refinancing

If paying a business loan is too costly for cash flow, refinance the loan or consolidate all debts into a single monthly payment can save money.

If taking on additional debt is not an option for a business, then using non-financing solutions may ease or solve cash flow problems by decreasing expenses or receiving cash from your clients faster.

B) Some of the Non-Financing Cash Flow Solutions

Offer discounts as incentives for paying early

Also called as “Early Settlement Discounts”, it gives around a 2-3% discount to customers in exchange for payment in 10 days as a financial incentive to pay invoices early. However, this incentive needs to be negotiated directly with each client. Do not allow customers to pay later and still take the discount.

Penalties for paying late

Let customers know upfront about penalties when payments are late, such as a 5%t late penalty after five days, incrementally adding 1% thereafter. Use automatically generated payment reminders. Make collection efforts or cut off services if past invoices aren’t paid.

Bad debts and a credit control system

Bad debts are amounts owed by customers that cannot be recovered. A credit control system is the process a business has in place to collect money owed by its customers. Establish a credit control system by setting aside a time to send out reminder emails/letters. When all fail, send bad debts to a debt recovery firm.
To avoid bad debts, review the commercial credit of your clients before you extend payment terms. For those with a poor credit history, ask for a deposit up front. For those with good credit records but with limited financial abilities to come up with large sums at once, spread out their payments over several months, or issue partial invoices they can pay as portions of the work completed. Others should prepay until they have built a track record.

Improve invoicing process

Use accounting software such as Quickbooks to automate invoicing and to speed up the payment process. Quickbooks provides data on who’s paying on time and who’s paying late, and makes it easier to collect overdue invoices.

Sync up credit terms with suppliers and customers

For example, if customers have 30 days to pay a business, but suppliers demand to be paid within 15 days, a potential negative cash flow can result. If possible, renegotiate terms with your customers and/or suppliers.

Re-negotiate supplier contracts

How much a business pays its suppliers can affect its bottom line. Sometimes moving just one point of gross profit can significantly increase cash within 30 days.

Redetermine gross margins

Small businesses can face pricing competitions and have to sell their products and services at low prices that they have very low gross margins. To grow, businesses need to have a clear understanding of their costs. Audit all costs related to products or services to arrive at an all-inclusive cost. Upon redetermining gross margin consider implementing strategies such as:
Increase the prices of products/services that have weak margins
If you can’t raise prices, drop products/services that have weak margins
Price all products/services based on their costs.

Although the above is not an exhaustive list, all of these solutions can improve overall cash flow management and solve cash flow problems. We at a2zCFO help businesses navigate through calm and troubled waters with more than 30 years of experience, as your outsourced CFO, navigator and your co-pilot. Contact us for a free initial consultation. We “keep your ship on course.”

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