Insights into Cash Flow Improvement Written by Ian James
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Cash Flow Improvement

 

Cash flow is the engine of all business. The effective management of cash is essential for survival, profit and sound business.

There are four ways a business can quickly improve its cash flow:

  • externally, by factoring; or
  • externally, by invoice discounting; or
  • externally, by offering early payment discounts; or
  • internally, by improving its own collections procedures.

Although factoring often leads to a faster injection of cash, there are a number of disadvantages. Less money is recovered for the business overall, and at the same time the business risks becoming permanently dependent on external resources. An alternative to factoring is offering invoice discounts for faster payment. However, the real costs of these discounts can be very expensive in terms of lost revenue.

A business that does not actively collect its receivables is operating sub-optimally. The cost of funds quickly erodes profit margins through delayed payment. Ironically, the loss of opportunity to deploy those funds elsewhere, either in purchasing discounts or product expansion and marketing channels, also increases the need to optimise cash flow.

Receivables management is essential to minimise costs and to enable both higher margins and competitive prices.

Factoring and invoice discounting both fail to address many of the opportunities for product or service improvement, enhanced customer contact and better dispute resolution - in fact these methods of obtaining cash often mask serious operational problems that really need attention.

Most businesses should be able to improve their internal collection techniques at a lower cost than by factoring or invoice discounting.

Managing receivables internally also allows your employees to remain at the front line of customer service and immediately take action to resolve issues that are preventing payment, such as the lack of an invoice, credit claims, and disputes about product, delivery or invoice values. In addition, if a customer is short of funds, then discovering this quickly provides the business with the greatest possible chance of collection. Often collection is a matter of ‘first in best dressed’.

To help you quantify the benefits that effective receivables management could bring to your business, we have a number of FREE resources that are available for download. Click here to access the resources.

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