HOW TO IMPROVE YOUR CASH-FLOW

Cash Flow

The definition of cash flow is the difference between an organizations cash income and cash outflow in a given period of time. An ongoing positive cash flow over several periods indicates the capacity of a business to generate surplus cash and, on the other hand, an ongoing negative cash flow indicates the amount of additional cash required to sustain the business.

If you wanted to start a business with absolutely no money or without getting a loan from the bank, it can be done. You can create a positive cash flow. First you must approach your suppliers and convince them that you will be able to provide them with a lot of business and they would be able to make a lot of money through my business selling their goods. Many suppliers will provide you with a credit line; however if you don’t pay on time the credit will be revoked. Often you will be subject to a credit review prior to approval of a credit line but credit checks from suppliers are often less stringent than those of banks or financial institutions. In obtaining a line of credit from a supplier, you can negotiate terms that are suitable to your needs, whether that be net in 30 days, 45 or 90 days. Even with a net 30-day agreement, most suppliers are fairly flexible and will accept payment within 45 days, however do not let it go beyond that or you will jeopardize your relationship with your supplier. In addition to negotiating the terms, you of course will negotiate a favorable price and other issues including delivery and so forth. Be sure to mention prices of the suppliers’ competitors and any offers they may have made in order to encourage the supplier to beat those deals. It is far more economical to obtain credit directly from a supplier than to borrow from a bank. Bank loans will cost you money not only in interest but you also may have to put up a personal guarantee whereas as long as you pay your supplier within the agreed upon period, you will not have to pay interest.

Once you have negotiated your credit with your supplier you can begin operating your business and creating sales, thus you will have income coming in for supplies, which you have not yet had to pay for, therefore your cash flow is positive. However, this does not mean you will not have to pay your bills, if you do not, you will be sued. If you are sued, that will result in a black mark on your credit. Anything that is reported against your credit is available to the next organization you apply to for credit. In fact, every time you apply for credit you are checked and the more checks on your credit, the worse your rating becomes. A company that has had a lot of checks on their credit seems like a risk to a potential creditor. Similarly, you can do research on the companies you wish to negotiate credit with. For example, using the Internet, you can conduct a credit report search yourself on your potential suppliers. In doing so, you will learn what their credit is like, you discover who to negotiate with and what terms you can ask for and what kind of terms they offer their other customers. Once you have all of this information you will be better prepared for a successful negotiation.

Cash flow is having sufficient money at the end of each month to pay your obligations on time. What are you obligations? They may be supplies needed to make your product, payroll for employees, rent and utility payments and other month-to-month obligations. These must be paid on time. A positive cash flow is how you will accomplish this.

If you purchase your materials on credit from your suppliers, make your product and then sell it, the next question is how you collect from your customers on time. To maintain a positive cash flow, you must be able to collect what is owed you in order to pay what you owe. If you determine that one of your clients may be a credit risk, you can choose to give him a cash discount, for example a 2% discount if he pays cash up front. This in turn will save your customer money as if he has to borrow money from the bank in order to make the purchase; the discount you give him offsets the interest he will have to pay. If he is unable to take advantage of such a good offer, then you have to reconsider his ability to pay in the first place.

Offering incentives to your customers is another way to increase immediate cash flow. You can call a good customer and offer him a deal whereby if he purchases 10 units you will give him one free or provide free shipping. Alternatively, you can offer this incentive if he pays COD, thus ensuring quick payment and an immediate boost to your cash flow.

Another way to gain immediate cash flow is to use your credit cards. This is obviously a short term, emergency solution, as you do not want to be in a position of paying too much interest. However, if you borrow funds from your credit card and pay it back within the month you may not have to pay any interest at all, depending on the agreement with your credit card company. Borrowing money against the value in your insurance policy is another short-term option.

Whether you are planning the short- or long-term funding requirements of your business, it is more important to forecast the likely cash requirements than to project potential profitability etc. While profit, the difference between sales and costs within a specified period, is an indicator of the performance of a business, the generation of a profit does not guarantee your business’ development, or even its survival. Although it seems contradictory, you should keep in mind that more businesses fail for lack of cash than for want of profit.
Sales and costs and, therefore, profits do not necessarily coincide with their associated cash inflows and outflows. For example you may have made a sale and delivered the goods, but have deferred the payment for a set period, i.e.: 30 days as a way of giving credit to the customer. At the same time, you still must make payments to suppliers, staff etc., so therefore you must have available cash to invest in rebuilding your stocks or buying new equipment.
The end result is that cash receipts often lag cash payments and, whilst profits may be reported, the business may experience a short-term cash shortfall. For this reason it is essential to forecast cash flows as well as project likely profits.

31 Ways of Improving Net Cash Flow
1. Increase sales (particularly those involving cash payments).
2. Reduce direct and indirect costs and overhead expenses.
3. Defer discretionary projects which cannot achieve acceptable cash paybacks
4. Increase prices especially to slow payers.
5. Review the payment performances of customers - involve sales force.
6. Become more selective when granting credit.
7. Seek deposits or multiple stage payments.
8. Reduce the amount/time of credit given to customers.
9. Bill as soon as work has been done or order fulfilled.
10. Improve systems for billing and collection.
11. Improve systems for paying suppliers.
12. Generate regular reports on receivable ratios and aging.
13. Establish and adhere to sound credit practices - train staff.
14. Use more pro-active collection techniques.
15. Add late payment charges or fees where possible.
16. Increase the credit taken from suppliers.
17. Negotiate extended credit from suppliers.
18. Make prompt payments only when worthwhile discounts apply.
19. Reduce inventory (stock) levels and improve control over work-in-progress.
20. Sell off or return obsolete/excess inventory.
21. Utilize factoring, or discount facilities, to accelerate receipts from sales.
22. Defer or re-stage all capital expenditure.
23. Use alternative financing methods, such as leasing, to gain access to the use (but not ownership) of productive assets.
24. Re-negotiate bank facilities to reduce charges.
25. Seek to extend debt repayment periods.
26. Net off or consolidate bank balances.
27. Sell off surplus assets or make them productive.
28. Enter into sale and leaseback arrangements for productive assets.
29. Defer dividend payments.
30. Raise additional equity.
31. Convert debt into equity.
Make medium- and short-term cash flow forecasts and update them regularly.
When preparing cash flow projections, be aware of the dangers of:
• Overstating sales forecasts
• Underestimating costs and delays likely to be encountered
• Ignoring historic trends or performances by debtors etc.
• Making unduly optimistic assumptions about the availability of bank loans, credit, grants, equity etc.
• Seeking spurious accuracy whilst failing to recognize matters of strategic importance
These problems can arise as the result of a lack of foresight or knowledge, or because of excessive optimism. They can lead to under-estimation of the cash and other resources required to sustain or develop a business with potentially disastrous consequences.

When forecasting bank requirements and preparing cash flow projections, realistic views should always be taken about future prospects. There is often merit in compiling "worst" case projections to complement "most likely" or "best" forecasts and to accept that the "worst" case might occur and to plan accordingly.

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