How to handle cash flow challenges

Cash flow problems?

Cash flow problems can result in difficulties paying bills, suppliers and staff or turn a short term credit into a permanent debt. If problems goes on for too long it is very difficult to turn things around. Here are some examples of cash flow challenges and suggestions for how to handle them.

Shortage of cash due to seasonal differences

Many companies deal with seasonal fluctuations in different forms, such as demand and supply or material costs varying over time. This can result in temporary cash shortages.

Using an overdraft is a flexible way to cover short term deficits. Get an overdraft approved and set up so that it is ready and available whenever the situation calls for it.

Customers who pay too late

If you notice that certain customers always pay too late you need to do something about it, such as:

• Add a penalty fee for late payers.
• Give a discount to early payers.
• Change the payment terms to demand faster payment or payments in advance.
• Use factoring – sell invoices and get cash faster without your customers suffering for it.

Customers who do not pay at all

There will always be risks involved with customer credits or receivables. Any customer could get into financial troubles, but the risk is often higher for new, unknown customers. New customers may also be more reluctant to paying in advance. Here are some solutions:

• Use direct debit to make sure you know the amounts and payment dates for incoming payments. This can also be used as a warning system – a cancelled payment could indicate that your customer has cash problems.
• When using factoring there is often an option to add insurance for the incoming payments.
• For international trade documentary credits or collections can be used. The buyer pays in advance, but the seller does not get access to the cash until the goods have been delivered. That way, both the seller and the buyer avoid risks.

Issues with deliveries from suppliers

For cash flow planning to work the production needs to be on time and so does deliveries from suppliers. If this is an issue you can:

• Negotiate a discount for late deliveries.
• Look into different types of insurances that can protect you.
• For international trade it is also important to know the rules for risks during the transports of goods. Make sure to know when your business is the risk taker and get insurance to cover these parts of the transport.

Good processes bring good cash flow balance

Many businesses can make vast improvements to their cash flows by revising their internal processes, such as invoice handling. Even if your business does not have any issues, making improvements is always good.

• By sending out invoices fast cash also come in faster.
• With good processes you have a better control of the payment flows and can react faster on late payments.
• By paying incoming invoices on time or early you could receive discounts from your suppliers.
• Digital invoice handling can give great results – look into installing work flow systems.