Blood is the lifeline of the human body. As long as our heart beats and blood courses through our veins, we are alive. We might be sick or ailing, but as long as we have blood and breath, we will continue to wake up every morning. When the body faces a shortage of blood, however, mortality knocks at our door. Blood conveys the necessary oxygen to our cells; when it diminishes, our bodies are no longer able to function and slowly shut down. When blood flow to the brain is cut off, death will usually occur within a mere ten minutes.
Your cash flow is the blood of your business. It enables the day to day functioning of the company. When cash flow is inadequate, the functions of the business slowly shut down, and eventually the business as a whole ceases to function. Just as an otherwise perfectly healthy person can face death if they lose too much blood, so an otherwise perfectly healthy business – one that is turning a profit and has good prospects of future income – can face demise if its cash flow can’t support it.
Here are three tips on how to keep the lifeline of your business intact, even when times are tough.
- Manage your inventory strategically. When cash flow is tight, it’s time to take a good look at how much stock you are carrying. Inventory represents cash potential, and while it’s necessary to have some inventory on hand, too much of it means cash that is being needlessly tied up, as well as extra storage and warehousing costs. Weigh up your options: is it worth delaying delivery of orders for a few days in order to free up some extra cash? Some companies define themselves by low inventory and warehousing costs. For example, upmarket furniture retailer Coricraft allows for a several week delivery period while they source and ship the product instead of customers taking it home with them on the day of purchase.
- Check commercial credit of clients. We’ve all been there: you’ve outlaid all the extra cash the business has, to fill a few large orders. You’ve delivered on time, and now all three of your clients have taken more than 60 days to pay. When you follow up on payment, they feed you various excuses about how they will pay the bill in portions over time. You discover too late that one of the companies is on the brink of bankruptcy and that another is a habitually bad payer. There’s very little chance of getting all your money back.
This cash flow nightmare can often be avoided by undertaking a credit check on clients who will be requiring risk on your part. If they are habitually late payers, or have a tainted credit record, consider paring down the size of their order or breaking it up into several smaller orders that will involve less loss if they don’t pay.
- Negotiate term credit from strategic partners. Often times, you just need enough cash flow to tide you over until you are paid for your next deal. If you have a close, strategic relationship with one or two vendors, they may be open to providing you with term credit. In other words, your vendor will extend you credit for as long as it takes for you to fill the next order and get paid. If this won’t work, your next option is to apply for purchase order financing to bridge the gap. If you have a clean credit record, you may be able to negotiate favourable terms for this financing with your existing bank.
If your company needs help in managing or buoying up its cash flow, The Finance Team can provide a solution. Our team of financial experts can help negotiate favourable credit terms for your business, reduce your overhead costs and cut down inventory outlays to ensure that your business’s “lifeline” continues to be just that.
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