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Most businesses experience cashflow difficulties at some stage. How do you improve the flow of cash into your business? Increasing your sales seems the obvious way to improve your cashflow, but this is only one of many possible tactics. This guide offers some ideas and a checklist at the end to help you draw up an action plan for your business.

All businesses would welcome extra cash to pay bills or to expand. This guide looks at tactics you can employ in three areas of your business to raise these extra funds.

1. Internal sources
2. Your customers
3. Your suppliers

1. Internal sources
   People often overlook internal sources of cashflow improvement. Before you look anywhere else, see how much money you can release from within your own business through improved management.

   Use cashflow forecasts to anticipate difficult periods and seasonal fluctuations. Good management begins with the ability to anticipate what lies ahead. Regular cashflow forecasts will show you when cashflow difficulties are likely to occur (such as seasonal dips) and will enable you to plan for shortfalls. You will also make a more favourable impression on lenders if you approach them for finance well beforehand rather than during a cashflow crisis. 

   Plan for your commitments
   Set money aside in advance for tax obligations and also for major bill payments. For more on this subject see the related Solution Guide: ‘Tax made simple.’ 

   Review or renegotiate your financing options
   Speak to your Business Banking Manager about different financing options. Is the structure of your financing balanced, and are you using the right kind of finance (for example, short-term versus long-term finance)? Could you make any changes to improve your cashflow position?

   Reduce stock levels
   You can get the quickest cashflow results from more efficient stock control – or getting rid of surplus stock. Stock is ‘money in chains,’ so look hard at your stock levels. Identify your fastest moving stock and concentrate on that. Hold a sale to free up cash by getting rid of outdated, surplus or non-core stock. The most efficient businesses are those that can turn their stock over quickest. Consider this: if you normally carry $50,000 worth of stock and you can reduce that by 20%, you can put $10,000 into your bank account. Could you achieve this several times a year?

   Increase sales (particularly cash sales)
   Brainstorm the quickest way of increasing cash sales. For example, delegate a staff member to contact the top 20% of your customers who give you 80% of your business. Offer them special deals or discounts for prompt cash payments. Could you sell them additional or complementary products or services?

   Reduce overheads
   Pay close attention to your business expenses over a six-month period to get a feel for where the money is going. Identify what you can cut back without affecting your service levels. Ask the hard question: “Are these dollars I’m spending really earning money for my business?”

   Review or defer all expenditure
   If you need office furniture or equipment can you buy second hand rather than new? Do you really need a luxury car? Could you downgrade one level? Ask: “Do we need to do this now? Is it going to be productive?”

   Look for extra income
   Do you have excess office or warehouse space? Could you rent out part of your office or facilities to bring in more cash? Could someone hire your equipment after hours? For example, a hairdressing business rented out its central city salon at night to a person who operated it as an all-night salon.

   Sell assets, rent or lease equipment
   Are there any unproductive assets you could sell? Could you sell and lease back certain equipment? Should you rent or lease capital equipment instead of buying it? Ask your accountant for advice here.

   Tighten systems and control staff
   Keep control of your own business. Who signs cheques and makes buying decisions? Reduce opportunities for theft or fraud or simply for thoughtless spending. One businessperson found staff had ordered sufficient stationery to last for five years ‘to take advantage of a good price.’ This money could have been better spent on growing the business.

   Subcontract rather than employ
   Could you save money (and administrative expenses) by subcontracting certain work rather than employing someone? 

   Factor your invoices
   Raise money quickly by discounting your invoices to a factoring company.

2. Your customers
   Raise prices
   Consider raising your prices. Many businesses are afraid of this step, but it often brings very positive cashflow results.

   Alternative payment methods
   Get to know your important customers. Putting some effort into good customer relations can pay quick dividends when you need cash in a hurry. For example, you could ask selected customers to: 
   • Pay by credit card (you get the money immediately, the customer gets up to 55 days credit).
   • Pay a deposit on a large order.
   • Make progress payments as work is completed or goods delivered.

   Make payments easier
   To encourage early payment, offer your customers as many payment options as possible, including direct credit, EFTPOS, and on-line payments.

   Improve communications
   Make it easier and cheaper for your customers to contact you: consider freephone and freefax services and promote your email address.

   Speed up the business cycle through e-commerce
   Reduce costs through e-commerce and speed up payments by emailing invoices and encouraging on-line transactions.

   Create efficient systems
   Work at releasing the money locked up in unpaid invoices. Efficient systems can greatly improve your cashflow. Here are some tips:
   • Credit check all new customers.
   • Invoice promptly, identify late payments early and follow up promptly.
   • Collect money faster. If your customers take an average of 45 days to pay you, set a goal of reducing this to 30 days. 
   • Change your terms of payment to 7 days net rather than 20th of the month following invoice date.
   • Consider cash discounts for early payment of invoices. 
   • Think of ways to increase cash sales and decrease credit sales.

3. Your suppliers
   Strengthen your relationship with your suppliers. Establish a good track record in paying your accounts. Once you’ve gained the trust of your suppliers by paying their bills regularly, try negotiating discounts or better terms of credit. Any discount is worthwhile, so always take them. Good relationships also mean a better chance of being offered special deals.

   Give ample warning of payment problems
   Give your suppliers ample warning if you foresee a problem in paying a bill. Nobody likes surprises sprung on them at the last moment. The closer your relationship with suppliers the easier it generally is to negotiate payment problems. Some options: 
   • Can you make a part payment?
   • Can you pay by credit card?
   • Can you ask the supplier to take back some surplus or obsolete stock?
   • Can you negotiate better prices or extended credit? (If you don’t ask, you don’t get!)
   • Can you find an alternative supplier (for example, by searching on the Internet) who might offer better terms?

   Just-in-time ordering
   Try to make your supplier or wholesaler your warehouse and let them carry the financial burden. (But balance stock reduction against your ability to satisfy your customer’s needs quickly and completely.)

   Cashflow checklist
   Finally, use the cashflow checklist that follows to identify possible cashflow tactics and draw up an action list for your business.

Possible cashflow improvements – Action NOW or Consider Later !

1. INTERNAL SOURCES

• Generate cashflow forecasts to predict problems
• Anticipate bill and tax obligations and set money aside
• Factor invoices to raise cash
• Reduce stock levels through sale
• Offer surplus stock to selected customers
• Increase rate of stock turnover
• Reduce overheads: defer spending/buy second hand equipment
• Tighten office buying and spending/reduce theft, fraud risk
• Subcontract rather than employ extra staff
• Sell surplus assets/lease or rent equipment
• Review or renegotiate financing options with Bank
• Look for extra income from unused equipment, space or facilities

2. YOUR CUSTOMERS

• Consider increasing prices
• Develop relationships and offer special deals to best customers
• Seek alternative payment (credit card, part or progress payment)
• Make payments easier, improve communications
• Speed up business cycle through e-commerce
• Credit check all customers
• Invoice promptly, follow up overdue payments promptly
• Change terms to payment in 7 days
• Collect money faster by shortening average collection time
• Sell additional or complementary products to customers
• Consider discounts for cash payment
• Increase cash sales, decrease credit sales

3. YOUR SUPPLIERS

• Develop relationships and a reliable payment track record
• Get advance notice of special offers
• Take advantage of discounts
• Ask supplier for alternative, more favourable payment methods
• Pay suppliers by instalments
• Pay by credit card
• Renegotiate terms/ask for extended credit
• Ask suppliers to take back surplus or over-ordered stock
• Use just-in-time ordering to reduce stock levels
• Search for alternative suppliers

Further information:
To talk to someone about your business banking needs call 0800 16 88 88 and we will put you in touch with the Business Banking Manager nearest you or visit www.nationalbank.co.nz/business

To download the ebook version of this post click here.

DISCLAIMER: THIS MATERIAL IS PROVIDED AS A COMPLIMENTARY SERVICE OF THE NATIONAL BANK OF NEW ZEALAND, PART OF ANZ NATIONAL BANK LIMITED (”BANK”). IT IS PREPARED BASED ON INFORMATION AND SOURCES THE BANK BELIEVES TO BE RELIABLE. ITS CONTENT IS FOR INFORMATION ONLY, IS SUBJECT TO CHANGE AND IS NOT A SUBSTITUTE FOR COMMERCIAL JUDGEMENT OR PROFESSIONAL ADVICE, WHICH SHOULD BE SOUGHT PRIOR TO ACTING IN RELIANCE ON IT. TO THE EXTENT PERMITTED BY LAW THE BANK DISCLAIMS LIABILITY OR RESPONSIBILITY TO ANY PERSON FOR ANY DIRECT OR INDIRECT LOSS OR DAMAGE THAT MAY RESULT FROM ANY ACT OR OMISSION BY ANY PERSON IN RELATION TO THE MATERIAL. © 2004 THE NATIONAL BANK OF NEW ZEALAND, PART OF ANZ NATIONAL BANK LIMITED. ALL RIGHTS RESERVED.

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