From Negative to Positive: How to Fix Cash Flow Problems
Table of contents
- From Negative to Positive: How to Fix Cash Flow Problems
- Profits are a Rumor; Cash Flow is a Fact…
- My Business is Profitable, but Why am I always Short on Money?
- Fixing the Gap between Cash In versus Cash Out
- 1. Use 13-Week Cash Flow Forecasting
- 2. Negotiate Customer’s and Supplier’s Terms
- Vendor Discounts Improve Margins
- 3. Disciplined Accounting Practices
- 4. Analyze your Product, Customer, Vendor, and Inventory Mix
- 5. Communicating Cash Flow Priority
- 6. Attack Fixed Expenses (SG&A)
- What is Selling, General, and Administrative Expense or SG&A?
- Ready for the owner-employees of Bankers Factoring to improve your company’s cash flow through invoice factoring? Call 866-598-4295 or go to Bankers-Factoring-Application.
Profits are a Rumor; Cash Flow is a Fact…
My Business is Profitable, but Why am I always Short on Money?
Business owners are constantly trying to close sales and make revenue for their operations. And as entrepreneurs, we strive and desire “whale” deals or clients and colossal revenue gains. However, if you are successfully growing your B2B or B2G sales, a new problem arises: all your working capital is gone before those 30-, 60-, or 90-day invoices are paid. Thus, the pain of negative cash flow is real.
Managing your cash flow can seem horrid, as efforts are focused on speeding up A/R collections and slowing down your payables schedule. Moreover, the delicate touch comes with attacking costs, and managing employee, customer, and supplier relationships.
But depending on your accounting processes and business management, your business could be underperforming by not receiving prompt payments or paying your suppliers too early.
Fixing the Gap between Cash In versus Cash Out
The gap between cash out and cash in creates shortcomings in cash flow. If your company can negotiate terms, then you can improve the receivable or payment cycle time.
Hence, if you are serious about improving your cash flow and managing your financing solutions, Bankers Factoring provides invoice factoring and PO funding. For instance, quick fixes like charging credit cards with high-interest rates are a poor decision for business owners struggling to meet payroll. More importantly, if you do not have the cash to pay the credit card bill in 30 days, then how will you pay your own bills?
So Bankers Factoring suggests the following six tips for any business serious about improving its cash flow.
1. Use 13-Week Cash Flow Forecasting
Planning the revenue flows to costs and expenses into the future is critical to have an accurate projection of ending cash balances. However, over 50% of small businesses do not even have a precise measure of operating expenses each month.
If your company is not tracking and recording primary accounting data, then it will not be prepared for the costs of rapid growth. Not to mention, higher sales typically cause headcount to increase and large inventory requirements.
Thus, it is time to change if your company lacks cash management, causing cash flow constraints. As Richard Branson said, “Never take your eyes off the cash flow because it’s the lifeblood of business.”
Predicting the future financial position of a business assesses the company’s ability to cover bills, payroll, and obligations.
To ensure your working capital is sufficient for operations, a cash flow forecast consists of three parts:
- Beginning Cash Balance
- Cash Inflow
- Cash Outflows
Depending on your business’s size, scope, and scale, your forecast could be done in excel, your accounting program, or outsourced to your accounting firm. A 13-week cash flow forecast is optimal to improve your liquidity crisis in turnaround management situations with distressed finances and working capital. In contrast, more traditional cash flow projections start weekly and build up to a trailing 12-month forecast in strategic growth environments. A rolling or trailing forecast helps identify trends in seasons or the annual business cycle. At the same time, the 13-week cash model looks forward to upcoming receivables and payables.
A 13-week cash flow forecast allows financial decision-makers to see how the next quarter-year of money flows will unfold. This cash flow model is popular in turnaround management scenarios as financial decision-makers can stop large expenses from occurring. By isolating a 13-week cash flow forecast, you can manage variances daily, weekly, and monthly, allowing flexibility with available liquidity. The granular approach of the 13-week cash forecast enables decision-makers to allocate funds appropriately daily.
Avoiding significant gaps from cash out and cash in an accounting period from cash flow management is essential for distressed businesses.
2. Negotiate Customer’s and Supplier’s Terms
Businesses faced with cash flow obstacles must work with their customers and suppliers on payment terms. You can reduce liquidity crunches by shortening the receivable cycle time and increasing your payment period terms with vendors.
It is common for distressed business owners to have a business where their average accounts receivable (AR) and average accounts payable cycles have significant gaps. For example, if your average payable is 30-days, but your average receivable is 90-days, then there is a 60-day period where you do not have sufficient working capital.
This 60-day period and the amount of cash needed are also called your float. If you are looking to overcome cash flow obstacles, Bankers Factoring is here to help with cash flow problems created by slow-to-pay accounts receivable.
Vendor Discounts Improve Margins
In addition, you can improve your gross margins and your company’s credit score by taking vendor early pay discounts. This is a classic reason to use Invoice Factoring & Purchase Order Financing from Bankers Factoring.
It is essential to see what terms are available to your company and compare the competition and industry with suppliers and vendors. With customers, you want to qualify all businesses before extending payment terms. You protect your business if you keep unqualified customers on prepaid or cash-on-delivery terms.
3. Disciplined Accounting Practices
Having a solid accounting process and controls is crucial if you want to improve your payable or receivable cycle times.
For example, if your goal is to reduce the amount of time it takes to receive payment, here are four questions to ask:
- What payment terms do you offer?
- What is the average time to get paid?
- How are the collections processed, executed, and supervised?
- When customer and vendor disputes arise, how quickly are they resolved?
Getting paid more quickly helps reduce the amount of float necessary for businesses. Also, extending your terms with vendors helps offset cash flow issues.
Here are four tips when your goal is to increase your payable terms:
- Ask the vendor what options are available.
- Get at least three quotes from competitors
- Inquire about a credit application
- Find out if payment plans are available
Keeping strong relationships with customers and suppliers is key regardless of your goal. You are not damaging your business when you follow up on collections or extend payment terms. Letting A/R age too many days or weeks and missing payment discounts are not the accounting discipline required for effective cash management.
Outsourcing A/R Management to Bankers Factoring will also accelerate your cash flow, by the sheer fact that all invoices are confirmed as being in your customer’s A/P System and a confirmation date when customers pay.
4. Analyze your Product, Customer, Vendor, and Inventory Mix
If you run a small business, you may address cash flow management as a whole business unit. Businesses benefit from looking at the mix of revenue from core business areas:
- Product Mix: what products sell the most?
- Customer Mix: what customers buy the most product, and what are their selling terms?
- Vendor Mix: where do you buy the most inventory, and what are their terms?
- Inventory Mix: how many fast and slow moving products do you have? Turnover cycle time?
By analyzing your business mix, you might discover that cash is tied up in places with poor efficiency. Where can you distribute your cash flow to maximize business efficiency and sales for your products or services?
It is vital to find where you have the most significant purchasing power and buy items one-off. Negotiating pricing discounts through volume buying or other requirements helps improve cash flow. The same is true for your customers. Just because one customer creates high annual sales does not mean that it is a profitable account.
5. Communicating Cash Flow Priority
Communication is critical to improving cash flow management because if employees do not know how they can influence cash flow, any cash flow improvement initiative is dead on arrival. Employees are motivated by their goals as they relate to their job and position in the company. There are many ways to communicate the importance of financial discipline in a company:
- Tie bonus plans to job performance, and ensure there are payout stipulations that manage cash flow
- Company values, mission statement, and other fundamental organizational makeup
- Annual meetings, quarterly business reviews, daily huddles, and town halls
6. Attack Fixed Expenses (SG&A)
Bankers Factoring had a client who was losing money despite rising sales. The Good News? Sales were $5.2 million per year. The Bad News? Total Costs were running at $5.5 million per year. Their breakdown by week shows:
|Total Sales||$ 5,200,000||$ 100,000|
|Total Expenses||$ 5,500,000||$ 105,769|
|SG&A||$ 1,560,000||$ 30,000|
|Direct Costs||$ 3,940,000||$ 75,769|
|Gross Profit $||$ 1,260,000||$ 24,231|
|Gross Profit %||24.2%|
|Net Profit $||$ (300,000)||$ (5,769)|
|Net Profit %||-5.8%|
Direct costs tied to producing their product could not be reduced quickly, but SG&A could be cut by at least the $5,800 they were losing every week.
What is Selling, General, and Administrative Expense or SG&A?
SG&A is the non-direct costs that a business incurs every day. All expense accounts that contain all business costs not directly attributable to making a product or performing a service.
Companies experience SG&A “creep,” where expenses rise over time, but income does not. Many companies’ profits increased during Covid as they still got products out the door, but they did so with a reduced workforce, confirming they had not managed labor cost bloat over the years.
Managing cash flow is important for all businesses and ensuring enough working capital is necessary for business owners to meet their goals. Using these six tips and working with our Bankers Factoring owner-employees, you can overcome your short-term and long-term cash limitation.
Bankers Factoring knows you can solve cash flow problems with a combination of cutting costs, taking vendor discounts, getting employee buy-in, and using our working capital factoring and purchase order financing solutions.