Solving the High Sales – Low Cash Flow Dilemma

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Solving the High Sales - Low Cash Flow Dilemma

For entrepreneurs, startups and small business, simply generating more sales might not be the answer. Successful businesses can still fail; find out how to improve low cash flow to make your organization more sustainable.

Why Low Cash Flow – Not Low Sales – is a Common Lament on Main Street

A Forbes article titled The Irony of Successful Sales Growth describes one of the challenges faced most often by small business owners and entrepreneurs as low cash flow. When an organization experiences low cash flow along with limited reserves and lack of resources (such as a business line of credit or the ability to obtain a bank loan), the seriousness of the situation becomes apparent.

Many businesses that are successful – in that they are growing and increasing sales – can even create their own recipe for low cash flow when the need to purchase additional inventory and increasing operating expenses outpace incoming cash flow. This can be especially difficult for B2B sellers who often extend especially favorable terms to customers as a competitive advantage.

“The entrepreneur’s lament is one of the great ironies of the marketplace;
a small business in danger of failure as a result of extreme success.”

(Jim Blasingame, The Irony of Successful Sales Growth, Fox Small Business Center)

But the challenges presented by low cash flow are not only limited to organizations like (B2B) business-to-business companies that sell to customers on terms. Retailers and service organizations also face the challenge of making hefty investments in inventories before offsetting sales occur. If a retail organization’s projections about consumer demand don’t match up with actual sales, they too may find themselves in a cash crunch.

Perhaps the best news for business owners trying to solve the challenge of low cash flow is that it is a common challenge, and there are many ways for a business to improve its cash flow. Here are some of the solutions for managing the challenge of low cash (or slow cash flow):

  1. Plan for growth so that you know where the money and resources needed for fast reinvestment will come from.
  2. Avoid use of operating cash for non-operating expenses (such as purchasing capital equipment).
  3. Closely monitor accounts payable and accounts receivable, and understand the relationship between Accounts Receivable Days (how many days it takes customers to pay) and Accounts Payable Days (how long you have to pay vendors).

Ideally, you will have the option to work with vendors who will extend terms that make it possible for customer payments to come in before supplier invoices become due; however, that is not always going to be the case.

You may also be able to speed up customer payments by offering discounts to customers who pay on delivery or who pay very quickly, require customers to make partial payments or deposits up front and conduct more thorough due diligence checks before extending customer credit. Plus, you can spend more time and money on collections efforts rather than taking a more passive approach to unpaid invoices.

Improve Low Cash Flow by Factoring Invoices and Stop Chasing Customer Payments

B2B organizations that invoice customers upon delivery of goods or completion of services may be able to improve cash flow and better manage receivables by factoring – or selling – customer invoices to a factoring company.

When one of our clients factors (or sells) an accounts receivable invoice, they receive same day funding for up to *98% of the face amount of the invoice for a fee, long before their customer is required to pay. Since our clients don’t have to wait for customers to pay, they can reinvest in growing their business more quickly.

In return for a low factoring fee* assessed as a percentage of the invoice amount (usually from 1-5%), the receivable is managed from creation through to collection. Once the customer has paid the invoice in full, any amount held in reserve against payment is also returned to our factoring client.

Get a free, no obligation quote for invoice factoring or request more information about the invoice factoring process.

Request a Free Factoring Quote

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In many industries, invoice factoring is a financing tool commonly used to help manage receivables, reduce collection and accounting costs, limit financial risk from bad debt and – of course – improve cash flow. Factoring helps and organization maintain a more consistent cash flow that is more closely aligned to the operational expenses – the costs of doing business – that are associated with it sales.

*Advances usually range from 80-98% and factoring fees usually range from 1-6%

**The reserve amount is the remainder of the invoice amount, less advance and factoring fee, that is held by a factoring company until the invoice is paid in full

Retailers May Be Able to Solve a High Sales – Low Cash Flow Dilemma Using Cash Advance Financing

For retail businesses like boutiques, salons, restaurants, service businesses and many others, leveraging customer receivables is usually not an option. However, retail sellers can use a business loan or cash advance to infuse money into their organization and resolve a temporary cash flow challenge.

Cash advance financing may be particularly appropriate for an organization whose growth is temporarily outstripping its reserves, because future sales will provide the money needed to repay the business cash advance.

Business and merchant cash advances are calculated based on the retailers sales history, but often can be awarded in amounts up to 150% of an average month’s sales. Business cash advances are repaid automatically via a daily ACH bank debit, while merchant cash advances are repaid automatically as a small percentage of each customer credit or debit card transaction. Usually repayment occurs over a period of 6-12 months, depending on the amount advanced and the rate of repayment.

Get a free, no obligation quote for business cash advance or merchant cash advance or request more information.

Get a Merchant or Business Cash Advance Quote

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