In the best-case scenario, limited cash flow might keep you from hiring or making improvements to your business. In the worst cases, negative cash flow might prevent you from taking on a new order for lack of supplies, keep you from meeting your operating expenses and payroll, or cause you to rack up unnecessary late fees due to delinquent payments.
The first step to solving your fears is to conduct a cash flow analysis. Mapping your invoicing patterns—and having a clear view of which clients stretch their invoice payments out for longer periods—is critical to improving your cash flow. Should you find that many of your clients are leveraging extended payment terms to your detriment, consider your options:
- Negotiate better terms. If a large purchaser insists on 90- to 120-day invoicing, consider negotiating a larger purchase order in exchange for the extended payment. You might also consider discounting orders if paid within 30 to 60 days.
- Shorten your invoicing cycle. If negotiations fail, consider the value that extended-cycle clients bring to your bottom line. Is it worth maintaining a relationship with a client who won’t negotiate equitable trading terms? After all, an invoicing cycle of three to four months is a real bonus for your client’s cash flow, even as it drains yours. Weigh this option carefully.
- Pursue an alternative. If a client’s business is worth the extended payment cycle, consider accounts receivable financing. This will allow you to have the majority of your accounts receivable on hand quickly for a pre-approved service fee.
Even if your clients pay in shorter timeframes, invoice factoring can still solve immediate cash flow concerns. If you’re in a pinch, work with a trustworthy factoring company offering timely approval at mutually beneficial terms.
