Having a hard time managing your enterprise’s cash flow? Are you tired of having to deal with your customers’ cyclical payment habits and the ups and downs of your business cycles? Have you decided that something must be done, but simply lack the tools to finally do away with cash flow as a going concern? Whilst most enterprises like to think they have a handle on the problem, the reality is far different. These are the enterprises that rationalise their cash flow problems. However, there are others who refuse to accept the status quo and do so by enacting some simple strategies to reduce the impact of a poor cash position. So how can your business improve its cash flow?
Whilst most business professionals will agree that prepaid customers aren’t viable options long-term, there is very little to argue as to whether they help reduce the impact of an uneven cash position. Customers that must prepay not only improve your cash position, but they also increase your gross profit on sales transactions. They do this by lowering your enterprise’s financing costs on inventory and receivables. It’s cash upfront so you only purchase what you have to in order to fulfill the customer’s order. Nothing more and nothing less.
Incentivising Prompt Payment Habits
Managing cash flow is also about mitigating risk. That means to incentivize customers to pay early. One possible solution includes providing a 1% to 2% discount on net-10 day terms. However, if you decide to adopt this strategy, make sure you product’s profit margins allow it. Incentivising customers to pay sooner only works if the discount doesn’t erode the margins on sales.
Having all that money tied up in inventory is extremely expensive. Take the time to define products as fast moving versus those that you need to reduce your inventory levels on. Classify products as essential to hold, versus those products your customers can afford to wait on. This will be much easier once you’ve identified those prepaid customers.
Proactively Manage Vendors
When cash flow isn’t a concern, secure your own prompt payment discounts like the aforementioned net-10 day terms 1% to 2% discount. Take advantage of those instances where cash flow is in your favour. Doing this will ensure you have more money when your enterprise encounters an uneven cash flow period.
Enterprises that adopt these aforementioned strategies are ones that eschew conventional wisdom. They enact simple and effective strategies to reduce the impact of an uneven cash position. Granted, those prepaid customers aren’t viable, long-term pursuits. However, they represent immediate sales and immediate cash!
Guest post provided by Touch Financial one of the leading services for business finance, help, advice and quotes.