Winning Businesses Manage Cash-Flow

Small businesses are particularly susceptible to cash-flow issues.  With credit harder to obtain and uncertain economic times, it is more important than ever to know how to deal with slow-paying customers.  Please consider Costco Connection’s Surviving the Cash-Flow Crunch: Tips for dealing with Slow-Paying Customers.  Excerpts are below (the full article can be found here).

Many large companies today have simply announced that as a matter of policy they will be paying their bills late—sometimes as much as four months late,” [Jeffrey] Leonard notes.  “This in effect forces small businesses, which really are hurting, to make free loans to big businesses instead of being able to use their working capital.”  Experts say small-business owners can
respond with a variety of steps, beginning with examining cash-flow options.

The first step [John] Barrickman recommends to small-business owners is to determine the
total amount of their uncollected accounts receivable: “This represents a large lake in which huge amounts of cash can be trapped.” The next step is to examine processes for managing cash.

“Can you use bank tools like lockbox, remote capture and electronic payments to process receipts and collect receivables faster?” Barrickman asks. “Banks offer a broad range of treasury management tools that small businesses can use to increase their available cash.”

Also take a close look at the flip side: your accounts payable. Lisa Aldisert, the president of Pharos Alliance Inc., a New York City management consulting firm, encourages clients to revamp their payables procedures in order to hold on to cash longer.

Factoring as an option

One option that many cash-starved small businesses are considering to help ease the cash-flow crunch is an alternative financing vehicle known as factoring.

With factoring, businesses sell their outstanding accounts receivable to a commercial finance company (or factor) at a discount. “Instead of waiting up to 90 days or longer to get paid, the business receives most of the cash—typically 70 to 90 percent of the receivable—when the invoice is generated,” says [Tracy] Eden. It receives the balance, less the discount, when the factor collects the invoice.

Eden explains, “The improved cash flow derived from factoring benefits a company’s relationships with vendors, enables additional growth and helps ease the demands on payroll.”

Factoring resources

• International Factoring Association (www.factoring.org): This website includes a Factor Search page to help you locate an IFA member that matches your criteria.

• American Factoring Association (www.americanfactoring.org): AFA educates the public and policymakers on the availability of working capital for America’s small businesses.

• Commercial Finance Association (www.cfa.com): Since 1944, the CFA has promoted the sound development of asset-based financial services including factoring; it publishes The Secured Lender magazine.