Cash Flow Solutions: Long Term vs. Short Term

Fixing Your Company’s Cash Flow Problems — Quickly and Long Term

Here are six strategies for addressing one of the biggest risks to a business.

When a company experiences a cash flow problem, it needs to find a solution fast. A cash shortfall can quickly multiply into a host of other dangers.

Fortunately, there are several ways to get relief quickly. Businesses can also reduce their risk over the long term by implementing a few larger investments in their operations.

No matter what type of cash flow challenge your company is facing, here are some actionable strategies for resolving the issue effectively.

Short-term solutions for cash flow

Get paid faster

Depending on the customer, it could take 60 days, 90 days or even longer for payment to arrive. Fortunately, companies can use services that let them access those funds ahead of schedule.

Discounting: Companies can incentivize customers to pay their invoices faster by offering a break on the price. Static discounting — with terms like 2/10 net 30 — is a common tactic. But businesses may have more success with dynamic discounting, where the earlier the payment, the larger the discount. C2FO Early Pay uses a dynamic discounting model that gives companies more control over the size of discounts, which discounts are accelerated and other factors. Funds can arrive in as little as 24 hours.
Factoring: Companies can sell their receivables to a third party known as a factor. The factor will quickly advance most of an invoice’s value — 70% to 90%, for example — and then collect the full amount from the customer by the invoice’s original due date. The factor then sends over the rest of the invoice amount with its fees subtracted. Those fees normally run from 1% to 5% and aren’t always transparent. Factoring also can affect relationships with customers.

Seek longer terms with suppliers

If a company can pay its suppliers later, that increases the company’s cash on hand — maybe enough to get through a difficult period. Here are a few tips for negotiating longer terms.

Find a way to make it win-win. If the supplier lengthens the payment terms, how can the company reward them? One way might be increasing the size of its next order.
Be upfront about problems. If a company is going through temporary difficulties, a supplier may be understanding and willing to adjust terms if the company explains what is happening.
Don’t ask for the moon. If an invoice is due in 30 days, extending it to 45 or 60 days is more realistic than 90 or 180 days.

Take a second look at invoicing and collections

If customers are taking too long to pay, it might be because the company is taking too long to send the invoice. Or maybe the invoices are inaccurate, so the customer is spending time contesting the charges.

Adding a system of timely reminders could also encourage customers to pay sooner, bringing in badly needed cash.

Long-term cash solutions

Upgrade inventory management

Inventory can become a drag on cash flow if it takes the company too long to turn it back into cash. Aging inventory also means higher holding costs in the form of storage and other expenses.

Companies can improve liquidity by improving their inventory management. For example, they could employ just-in-time ordering, keeping inventory on hand for shorter periods of time. Be careful with this strategy, though. There’s also a higher risk of running out of stock in the event of a supply chain disruption.

Find more ways to make money

When a company diversifies its income streams, either by introducing new products and services or by entering new markets, it reduces its risk of a cash shortfall. If one stream weakens — or totally shuts down — the company can still generate cash from the others.

There’s a potential risk here, too. A company can overcommit resources to new initiatives that don’t work out, making its cash situation even worse. Any new efforts need to be a good fit for the existing business.

Invest in efficiency

It takes time and money to implement new billing and accounting platforms, but they can automate many time-consuming tasks. They can also speed up invoicing or streamline payments — for example, by letting customers pay their invoices through an online portal.

Analytics offer another way to increase cash flow over the long term. If the company can forecast demand, it can fine-tune its inventory and pricing strategies, allowing it to maximize incoming cash.

The same goes for customer behavior. A company might use data-driven analysis to identify the customers most likely to churn (so they can be targeted with special offers) or those most likely to default (so they won’t be offered generous payment terms).

One other piece of advice

It’s also important to produce a cash flow forecast regularly so a company can identify problems as soon as possible.

The bottom line on long-term vs. short-term cash flow solutions

Companies optimize their cash flow in multiple ways. Sometimes it’s through faster solutions, like early payment, improved invoicing or negotiating longer terms. They could also take a longer view. They might improve their inventory management, add income streams or refine operations.

The smartest businesses have both types of solutions in their toolboxes, giving themselves more options for responding to cash flow problems.