On paper, it looks as though your business is doing very well for itself. Your company’s earnings are more than its obligations and sales are continuing to increase with each passing day. If your business seems healthy, you might wonder why you are struggling to collect enough money to pay your bills or to meet payroll.
There can be a disconnect between profits on paper and actual cash on hand. Depending on your business, you might have months when sales are higher than usual, but during which you have difficulty making ends meet. Fluctuating levels or uneven levels of cash flow can stymie even more established businesses. If you’d like to stop relying on debt or credit to make ends meet, here are a ways you can even out your cash flow concerns.
Adjust Payment Terms For Customers
One of the biggest reasons why companies face cash flow issues is because they aren’t collecting payments from their customers quickly enough. If many of your company’s contracts include net-60 terms, your customer gets to enjoy the use of your product or service for up to 60 days before paying for it. Meanwhile, your company might be stretched thin or relying on credit to get it through until your customers pay their invoices.
Changing the payment terms you offer customers is an easy way to eliminate uneven cash flow worries. One option is to have customers pay at least of portion of the cost of a service or product up front, then pay the remainder on receipt of the final product. That way, your business isn’t running on debt or on empty as it works to keep a customer happy.
Another option is to incentivize early payments. Odds are likely that your customers will want to maximize or smooth out their own cash flow by taking advantage of net-30 or net-60 terms. But, if you give them a reason to pay early, such as a 15 percent discount, they will be more likely to do so.
Also take a look at how customers are paying your company. It’s not worth risking or harming the relationship if you have a customer on a net-30 contract who has been good about paying early or on-time. But, if you have a customer on a net-30 contract who regularly pays late or misses payments, it’s in your business’ best interest to ask for partial or full payment up front or to otherwise adjust the terms.
Adjust Payment Terms for Your Company
While you want to offer your own customers payment terms that encourage quick payments, when it’s your turn to be the customer, it can help your cash flow to negotiate terms that extend the payment period. Work with vendors and see if they will offer net-60 or even net-90 payment terms, without requiring upfront payments.
To keep the vendors you work with happy and to avoid any extra fees or interest, which will negatively affect your cash flow, make it a point to always pay your accounts payable on time and in accordance with your contracts.
Look for Patterns
Every company has its ebbs and flows. Part of managing uneven cash flow is figuring out when during a year your company is likely to experience an ebb. It might be early fall, if summer is usually a slow season for your business. In contrast, if winter is a busy time for your company, you might find your business flush with cash in the spring, as customers pay up. A virtual CFO can help you analyze the cash coming in and out of your business and help you recognize the patterns of cash flow, so you can adequately plan for the months when the amount of cash on hand is lower than usual or nearly non-existent.
At New Direction Capital, our goal is to help your company reach its goals quickly. To learn more about how to manage an uneven cash flow and what you can do to increase your company’s growth, contact us today.
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