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Critical Steps to Improving Cash Flow

written by: Ian Johnson•edited by: Linda Richter•updated: 12/12/2010

Improving cash flow is a concern all businesses have. However, as frustrating as it might be, there are some straightforward approaches that companies can use to alleviate the issues of an uneven revenue stream.

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    Critical Steps to Improving Cash Flow

    For most companies, properly managing cash flow can be an extremely exasperating endeavor. However, there are some simple and straightforward approaches to improving cash flow that all companies can adopt. Interested in knowing what these approaches are?

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    The Importance of Properly Managing Cash Flow

    Every company is eventually burdened by cash flow issues. Meeting payroll and paying vendors' bills, while keeping operations running, can often seem like a juggling act. This is perhaps one of the biggest reasons why companies use business loans and credit lines. However, these business credit lines are also needed to secure the inventory companies need to capture market share and increase sales. When companies have stretched their credit limit and have to deal with an uneven revenue stream, it can often seem overwhelming. So, the question remains, what are the critical steps to improving cash flow?

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    1. Pursue Prepaid Customer Accounts

    One of the best ways to address cash flow is to actively pursue customers without credit. Why? Well, these customers are rarely the focus of entrepreneurs. In fact, most companies ignore them completely and choose to avoid those customers unable to secure business credit. However, prepaid customers not only help to alleviate issues with cash flow, but also defeat the daily cost of money and its impact on gross profit. In fact, the gross profit on prepaid accounts is much higher than those customers with credit because the company isn’t financing any receivables.

    2. Offer Prompt Payment Incentives

    Don’t just pursue prepaid customers--make it a point to actively pursue prompt payment initiatives with all customers. As mentioned, prompt payment not only protects the gross profit on the sale, but dramatically improves cash flow. One of the most common approaches is to incentivize prompt customer payments by offering net-10 day terms with a 1% invoice discount. This helps customers save money by securing a discount, while your company gets paid faster.

    3. Offer Discounts & Incentives for Prepayment or Partial Prepayment

    If offering net-10 day terms isn’t an option, then offer pricing discounts and incentives for prepayment or partial prepayment. Improving cash flow doesn’t need to be difficult. Use the same approaches with your best customers as you would with those accounts that can’t secure credit or must prepay. However, in this case, incentivize your best customers by offering discounts for prepayment or partial payment. Some companies offer a discount if customers are willing to prepay 25% or 50% of the order’s value.

    4. Negotiate Prompt Payment Incentives & Discounts with Vendors

    For a number of companies, cash flow is a seasonal or cyclical concern. For those periods when cash flow isn’t a concern, make sure to secure prompt payment discounts with your own vendors. Improving cash flow is all about saving money, and nothing saves money like securing your own discount for paying early. Make sure to negotiate your own discounts with your vendors and creditors.

    5. Use Invoice Discounting & Factoring Options

    If all these approaches fail, then it might be time to consider using invoice discounting or factoring. However, both must be considered as a last resort. Invoice discounting and factoring allows companies to use their receivables as credit, or collateral, with a financing company. In return, the financing company will provide a portion of the receivables' value to the company and allow them to continue to draw upon the value of unpaid customer invoices.

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    Putting it all Together

    While there are other approaches to improving cash flow, these five are perhaps the most effective. As mentioned, cash flow is often a seasonal or cyclical business concern. There are bound to be times when a company isn’t burdened by issues of cash flow. During these periods, companies are best served by securing their own discounts on prepayment. Consider it a deposit.

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