As every business owner knows, cash flow is the lifeblood of any business. It affects every aspect of the business, including payroll and payroll taxes, vendor payments, operating expenses, inventory and equipment acquisition, and capital improvements.
The issue of cash flow, largely attributable to the payment of a company’s invoices, relates to the timing of receipts. There is an expectation when a company issues an invoice with terms, say net 30 days, that the customer will pay within the stated terms. Unfortunately, in too many instances, such is not the case. Delayed payment of invoices, across many industries, is highly prevalent and clearly has a negative impact on the company issuing the invoice. In the absence of predictable cash flow, important and sometimes critical decisions and actions are deferred. Missing a payroll date, not making timely payroll tax payments or delaying vendor payments all impact business relationships.
When you view this scenario more broadly, and seek to understand the underpinnings, the conclusion is simple — for the most part all companies have the same issues. Be it your customers or your vendors, they all grapple with the same problems. Given a variety of issues affecting their businesses and the perceptions of their owners, the tendency is to hold onto cash as long as possible. These issues include systemic challenges in their industry, uncertainty as to the economic direction of the economy, recently enacted tariffs that can impact companies importing or exporting overseas, as well as others. I’ve seen small and medium sized businesses that deal with large corporate customers have another problem. Often the large customers, knowing that the company is heavily reliant on their business, will increase, sometimes dramatically, the length of their payment terms to 90 or 120 days. This is often a “take it or leave it” situation. Clearly, waiting for 3 to 4 months to receive payment puts an undue burden on a company trying to operate their business in a timely manner.
In addressing this situation, business owners can employ various methods and procedures. A suggestion is to have a new customer complete a credit application with bank and trade references. In many instances the business owner doesn’t monitor the aging of their invoices and only is alerted when they are well over term. Written and phonecall reminders to their customers just prior to the payment coming due can often spur a response as to when the payment can be expected or if there’s an issue that could delay payment. Another approach, if economically feasible, is to offer a discount off the invoice amount if payment is received early. An example would be a 2% discount if the 30-day invoice is paid in 10 or 15 days.
Another method that can be utilized to create a predictable level of cash flow is invoice financing. A company can assign ownership of invoices from creditworthy customers to a third-party finance company that will advance funds to the company on an immediate basis. When a customer pays the invoice, payment will be routed to the finance company’s account. This method doesn’t change any aspect of the relationship between the company and its customers — only the direction of payment. The obvious benefit to the company is that they know when funds (cash flow) will be available and can therefore run their businesses in a timely and strategic fashion, free from the uncertainty and stress from delayed invoice payment.
In my many years of working with a variety of companies employing this methodology, I’ve witnessed a dramatic improvement in the financial and emotional impact it has had on owners as well as on all the functional aspects of their businesses.
