Cash is king: Part 2

In our July edition of 'Worrells – On The Pulse' we went back to basics in 'How to manage cash flow for business success'. This article covered how clients get into insolvency situations and listed questions advisors could ask clients to help them get a handle on their cash-flow requirements and correct any deficiencies.

However, understanding cash-flow cycles and planning strategies to navigate a business's peaks and troughs, is just half the battle. Clients must also ensure they maximise the cash-flow sources available to their businesses.

That's why this month, I'm delving into the options that improve cash flow and, when insufficient, where to get additional funding.

Many businesses have substantial working capital tied up in ordinary trading obligations. With this in mind, below are my top suggestions to manage and improve cash flow:

  1. Implement budgeting and forecasting—and regularly monitor whether expenditure and income match projections.
  2. Increase pricing / staged pricing—consider whether the pricing strategy reflects what the market can bear or are prices being undercharged.
  3. Ensure you get paid—conduct credit checks on customers to reduce the risk of bad debts, require deposits or partial payments on large orders or long-term contracts.
  4. Get paid faster—send invoices promptly, consider mobile payment solutions and offer discounts for advance or timely payment.
  5. Consider cost reductions—look at supplier alternatives, physical premises versus online, and in-house processing versus outsourcing.
  6. Pay Suppliers less—pay on due dates only or seek discounts for early payment. Form a buying co-operative—team up with competitors and ask suppliers as a collective for better rates on stock.
  7. Improve your inventory—ensure capacity isn't consumed by obsolete stock.
  8. Lease equipment rather than buy it—particularly if equipment is not constantly in use or it requires frequent upgrades.

Sometimes, existing funding sources are just not enough and the traditional options for additional funding aren't available. In these cases, it may be worthwhile considering alternative forms of capital funding, such as:

  • Overdraft Facility—an overdraft facility with a current bank can be useful in emergencies and can provide a comparatively low-cost funding option to other short-term funding options.
  • Unsecured Finance—unsecured funding options are available to qualifying businesses/applicants.
  • Inventory Financing—provides funding for large orders, which ensures suppliers are paid on time. Typically, it's used by businesses in manufacturing, distribution, wholesale, import or export (businesses requiring funding for growth or seasonal sales).
  • Export Factoring—An advance on international invoices that facilitates international transactions.
  • Purchase Order Financing—uses businesses' purchase order/ supply agreement or contract as collateral.
  • Invoice Factoring—obtaining a line of credit against outstanding invoices.
  • Debtor Financing—selling invoices to a financier at a discounted price for a cash injection.
  • R & D Funding—available for businesses that qualify for a research and development tax rebate.
  • Credit Cards—while expensive, if managed well, they can provide a short-term, interest-free (if repaid in full) funding option.
  • Equity Capital—injecting funds into a business as equity from internal or external sources.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.