As discussed in a previous article, cash flow is oxygen. In the previous article the discussion centered on establishing terms with your customer and invoicing them in a way the makes it easy for them to pay.
But what do you do if your customers don't take advantages of your incentives? What if they are fighting their own cash flow problems too?
A number of years ago I was the Sales and Marketing Manager for a small environmental laboratory. Our customers were working projects that typically involved the government and/or litigation of some sort. We wanted them to pay in 10 days, and offered a 2% discount incentive.
The problem was, they would submit the samples to us, we would do the analysis, they would have to incorporate that data into a huge report for the EPA or legal action. That report might take them 3 months to complete. They could not bill their customer until the report was submitted.
No matter how much they wanted to take advantage of our incentive, it was impossible for them because of their cash flow issues.
The good news was, when our customers realized that 2% discount for 10 days really amounts to well over 24% interest over a years time, the decided to use short term financing. They were able to get loans at 8%-10% APR. To them, that was an annual savings of better than 14% on our laboratory service.
But there were also customers that did not or could not get the short term financing and we had to make some decisions about how to handle our cash flow.
Here are some of the choices you have available to you, all of them have their pluses and minuses.
- Depending on your situation, you can always fire the customer. The may be a really good or profitable customer but if their slow payments are bringing your company down or slowing your growth, sometimes you just have to cut them loose.
- If they are a very Good customer and you are making substantial profit from their business, you may want to consider a factoring house.
Factoring houses are finance companies that buy your receivables at a significant discount. The usually cherry pick the receivables they buy and the higher the risk, the higher their discount.
They also may want to invoice the customer directly or make collection calls when the customers pay slow. This can make your company seem really small in the eyes of your customers and they may move on to another supplier who does not choose to use factoring services. - If you qualify, consider using a bank line of credit or credit cards to float your short term debt.
The down side of this is if your customers really stretch out their payments to you, it is going to be difficult to keep up with these short term payments. And, if you are significantly late or late too often with your payments, they may cut you off and call the note due. If that happens your company can be in a real world of hurt. - If you have a viable business and one with a strong track record or great potential, you may be able to find some "Angel Investors" to help you finance your cash flow.
Depending on the investment environment this financing can be very difficult and very time consuming acquire. You will have to provide financial statements, do formal presentations, do dog and pony shows, etc. to attract these investors.
If you do attract investors, you are going to have to tighten up your bookkeeping, plan on financial audits, and prepare K1 and other tax forms for them. - If you have good relationships with your customers, you can set some requirements for down payments on large projects. Usually they will understand if you explain to them that your are not a bank and are not set up to finance their project.
- Depending on the nature of the products or parts you provide for them, you may want to see of they use procurement cards. If they do, they could make the payment or down payment with the procurement card.
Procurement cards work like credit cards and you will have to have a merchant account to process them. Similarly, there will be fees associated with using the procurement cards and you will want to make sure your profit margins can support the additional cost. If your margins are fairly good, you may want to offer the customer a percent or two discount to use the cards. This improvement in cash flow can be well worth the cost to speed it up.
This is a short list of ideas you may want to consider when trying to speed up your cash flow cycle.
Remember, it does not matter how profitable you are, if the cash flow is too slow you have no way to grow.