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Dealing with the big C. Don’t let cash flow kill your business

Article by Fedgroup

With constant improvements in technology, the business environment is constantly changing, but if there is one truth that persists, it is that cash flow remains the number one business killer. Even enterprises with strong business plans and a good client base can run into cash flow problems severe enough to close the doors of the business if they get their math wrong.

Passion and vision are the key components of business success, but they mean precious little in the absence of cash flow. When the cash flow dries up, the only way to survive an unexpected crisis is to have a large emergency fund. Few businesses have that luxury, so here are a few cash flow tips designed to buffer you against cash flow constraints.

Growth

This may sound counter-intuitive, but quick growth has killed many businesses. When a business needs to expand quickly, it is usually because it has landed a big client and needs additional resources to cope with the new demand. Acquiring these new resources costs money, but you will only get your money once your new big client pays. When this payment is delayed, the creditors of the business can become very jumpy, which could put the enterprise in jeopardy.

Don’t let greed be your enemy. No matter how good a deal looks, you have to ask whether the business can survive if a new big client doesn’t honour the contract. The long-term survival of the business is always more important than the promise of a quick buck. If the risk is too large, walk away or try to negotiate only doing a percentage of the work, with the possibility of growing your output in the future, once the money starts to come in. You need to do whatever it takes to ensure that you live to fight another day.

When a deal is too good to pass up, you may have to look at other tools at your disposal, such as the appropriate finance. In the past, there was the notion that a business that applied for debtor finance was in trouble, but this is no longer the case. It is now considered a cash flow management tool that is especially valuable to the smaller business owner, who usually does not have the clout to negotiate longer repayment terms from creditors and shorter repayment terms from debtors.

The disparity between how quickly you are expected to pay your accounts and how long your debtors take to pay you is often the reason for poor cash flow and business owners need all the tools at their disposal to bridge this gap.

You may have more negotiating wiggle room than you think

As you build up relationships with your clients and your suppliers, do not be shy to open the discussion on improving your repayment terms. If they value you, they may well reconsider. As you are the owner of your business, better repayment terms are like giving yourself a raise. And just as with any other raise, if you don’t ask, you don’t get. A recent survey in America found that one of the big differences between performing and struggling companies was that the ones that performed were able to stretch their repayment periods and shrink their collection periods. If your creditors do not want to budge, you could try to negotiate better terms for early payments.  

Upfront fees

It is a dog-eat-dog world out there, and you as a business owner know that your suppliers are going to give you the worst possible repayment terms. You should also push your clients to pay sooner, as long as you do not scare potential business away with uncompetitive terms. Smaller businesses with less established credit records present a greater risk of non-payment, so you may well be able to charge upfront fees and have the client take the risk together with you.

You have a voice and it is called an invoice

Prompt and through invoicing can do wonders to improve cash flow. If you are not bothered to get invoices to clients quickly, they may not be bothered to pay you quickly.

Stock control

Another differentiator between successful and unsuccessful businesses is stock control. The movement of products has to be monitored carefully, because if some of the products in your range take too long to turn into money, they are costing you money, either in terms of the money you paid or are owing for it, or in terms of warehousing costs. If a product is not moving quickly enough, it may be best to keep less stock, or scrap that line of business altogether.

Common goal

Despite the importance of cash flow, employers are often afraid of addressing the topic with employees because it may seem as if the company is in trouble and cause them to jump ship. However, it could be approached in terms of a positive incentive, where company-wide bonuses are paid if cash flow improves. This will ensure that all employees familiarise themselves with the factors that improve cash flow and work towards improving on them in all areas of the business.

Dead wood

The biggest cost to a company is its payroll, which is only fair, as workers are supposed to be the company’s biggest asset. While legislation and unionisation make it difficult to get rid of non-performing workers, when someone is costing you money without contributing to your bottom line, it may be time to let them go.

Manage yourself

Every penny you take out of the business for yourself is one less to go towards cash flow. Successful business owners bite the bullet in the first few years and reinvest as much as possible to help the business grow. If you get it right, the benefits you reap later on more than compensate for the initial sacrifice.

Fedgroupis a proud Partner of the NSBC.