Finance and Lending
How a Fast Cash Flow Protects Your Business
Sept. 1, 2022 |
The C2FO Team
Increase your cash flow, and you create a wealth of advantages for your company.
Of all the ways you can measure performance, there may be no key performance indicator more important to your company’s daily operations and future growth than having a fast cash flow. To thrive, money must be coming in quicker (and in greater amounts) than it leaves your accounts.
How important is cash flow? According to C2FO’s 2022 Working Capital Survey, it’s the most available and most used source of financing for businesses.
Having a consistently positive cash flow means that you can:
Meet the cost of inventory, payroll, overhead and other expenses that must be paid on a regular basis.
Cover the cost of investments until those investments start to pay for themselves. For example, it might take months before new hires start to contribute to your company’s revenue, but their salaries and benefits must be paid as soon as they begin work.
Qualify for loans and lines of credit more easily. Poor cash flow and quality of earnings was the No. 1 reason why businesses’ loan applications were rejected, cited in 25% of cases, according to the 2021 Pepperdine University Private Capital Markets Survey.
Take advantage of special deals that may require a larger upfront investment — like claiming a 20% discount on your next inventory order if you pay in advance.
When it comes to cash flow, speed saves
Unfortunately, many businesses fail because they never learn how to accelerate their cash flow. It takes them too long to convert their invoices back into cash, even as their own bills pile up. They get behind on their invoices, and soon their suppliers stop doing business with them. If they can’t turn things around, the company fails.
Having fast cash flow is especially important during times of high inflation. When a company gets paid faster, it can reinvest those funds by buying more inventory or raw materials before inflation drives the costs even higher. Used consistently, this strategy can help protect a business’s margins.
Fortunately, there are several ways that businesses can increase their cash flow by encouraging their customers to pay faster. Here are just a few time-tested strategies.
How to accelerate cash flow
Offer a discount for early payment
Your customers are like anyone else — they’re always looking for a better deal. By providing a discount, you give them an incentive to cut you a check ahead of schedule.
For years, companies would offer a static discount such as 2/10 net 30, where their customer would receive a 2% discount for paying within 10 days. Otherwise, the entire invoice would be due within 30 days. It’s a “static” discount because the terms don’t change if the customer pays immediately or pays on Day 10.
More businesses now use dynamic discounting to encourage early payment. “Dynamic” means the size of the discount varies by how quickly the customer pays. The earlier the payment, the bigger the discount. (Dynamic discounting is a key function of C2FO’s platform.)
Dynamic discounting is a win-win for businesses and their customers. Obviously, the businesses receive an injection of cash faster than expected. The customers, meanwhile, reduce their cost of goods, and their discount is usually larger than what they might earn by putting their cash in a money market account or another short-term investment vehicle.
Charge interest or penalties for late payments
It’s always a good idea to offer a carrot, but some customers only learn if they get hit with the stick. To create a sense of urgency, consider charging a 1% to 2% fee for clients that miss their payment deadlines.
Optimizing your billing practices is one of the best ways to make your cash flow faster. After all, the faster you bill your customers, the faster they can pay you.
What “faster” looks like in practice, however, will depend on your business and your customer base. Some business advisors recommend invoicing as soon as the customer has received your product or service, or at least weekly, but a larger enterprise might prefer to receive one monthly bill. Some clients have fairly regimented payment systems and may need to either be billed at the halfway point or end of the month.
A streamlined billing practice should also make it easy for customers to pay their bills. If you’re sending invoices electronically, include a link to the payment portal and share information on other ways they can arrange payment, whether that’s via a phone call or posted mail.
If this sounds like a lot of work, a good accounting and invoicing solution can automate many of these tasks, from creating invoices to sending reminders when customers fail to pay.
Adopt best practices for collections
Globally, about 3% of customers never pay their invoices, C2FO’s 2022 Working Capital Survey found. Those bad debts can have a significant impact on your margin.
You can reduce the risk of bad debts by actively contacting clients as soon as their invoice becomes overdue. Maybe your invoice fell through the cracks and your customers simply need a reminder.
Employ a full-spectrum approach when contacting nonpaying customers — use email, text messages, chat, social media and snail mail. And don’t underestimate the power of a phone call. By reaching out, you create the opportunity for a productive conversation with customers. They might be short on cash, so you could extend their payment schedule or eliminate their late charges — something they might have been reluctant to request if you hadn’t called them.
Depending on the size of your organization and your number of nonpayers, you could also adopt a customer segmentation strategy. You would use a machine learning model to determine which customers will end up paying without any intervention on your part, which will never pay and which ones simply need to be contacted. That way, your collection team can focus its attention on the last group.
Remember the magic words
According to research from FreshBooks, invoices are more likely to be paid when they include the words “thank you” (89.61%) and “please” (88.07%).
The bottom line about fast cash flow
Cash flow is one of the most important barometers of your company’s health, and everything you can do to accelerate payments will put your business on more secure financial footing. Offering a discount for early payment is a tried-and-true strategy for fast cash flow, but there are many others. Businesses also can encourage payment with streamlined billing, fees for late payment and persistent collection policies.
Need help speeding up your cash flow? See if any of your customers are offering early payment through C2FO’s industry-leading platform.