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Improve Your Business Cash Flow While Extending Credit To Customers

Guest post by: Joseph Lizio

Article Overview: Extending credit to customers can put your business in a cash flow bind. But, there are a few tips to negate these negative impacts.

Improve Your Business Cash Flow While Extending Credit To Customers

Many businesses whose main customers are other businesses fall into a trap of extending credit (much like a bank) to their customers. This is usually done via invoice financing or allowing a business 10, 30, 60 days or more to pay for the products or services provided (called trade terms). While many business owners feel compelled to extend credit to their customers for fear of losing future sales or simply because it is standard industry practice, if not properly managed businesses can easily find themselves short of cash when paying their suppliers or employees.

If your business finds itself in this situation, allowing customers to delay payment but finding itself short when paying its obligations, here are a few suggestions on ways to improve your business's cash flow while at the same time satisfying those ever important customers:

1) Work with your customers to ensure the shortest period possible for this payment extension and never, ever let allow them to go over that date. Thus, if your customer's sales cycle is only 20 days (they receive your goods, add value and sell them off in 20 days), then they should only be allowed a 20 day extension to pay you.

2) Work the other side by getting your suppliers to extend you credit; some where at or above the average time you give to your customers. Example, if your customers have an average of net 30, then ask for 30 days or more from your suppliers (allowing you to collect from your customers before your payables are due to them). Now, this will not negate what your business may have to cover in labor costs and other overheads - but will minimize the amount of cash you have flowing out of your business in regards to raw materials before you get paid by your customers.

3) Factor your invoices to get cash today. You can sell off your accounts receivable to a factoring company and immediately receive up to 90% of those invoice amounts. Then, when your customers pay your business, you can return those funds to the factor and keep the remaining 10% less any factoring fees. Your business can then use those funds to pay current bills, suppliers, take advantage of early payment discounts, meet other obligations or to simply find additional customers to grow your business.

While there is a small cost to factoring your receivables, think about it this way. What is the cost to your business for paying suppliers or vendors late? What about the cost of missing payments and being shut off? Or, even bouncing checks, bank account fees for not meeting minimum balance requirements or in lost business?

Is that cost higher (or has the potential to be higher) then the cost of factoring your invoicing and moving ahead with your business?

Note: Factoring companies can also save your business additional expenses by helping with or taking over your collection efforts on customers who are late paying their invoices as they know they don't get repaid unless your customers pay you.

What most businesses find is that by working all angles; the customer, the suppliers and the financing companies, that there is some balance between all of these that allow the business to essentially wash all costs associated with extending credit - essentially creating a neutral business impact from delaying customer payment.

Thus, while your business may not be able to use these suggestions to get a leg up, these techniques are so much better than having to turning down profitable customers simply because they ask for or expect a few weeks to pay.

Use the tactics listed above - limited customers payments terms, increasing time for payment with suppliers and accounts receivable factoring - to your benefit. Therefore, when faced with having to extend credit to your customers (as is the standard practice) your business can be assured the lest amount of cost or expense in doing so - saving your much needed cash flow for the benefit of your business's future.

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Article Tags: account receivables, business, cash flow, credit, invoice



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Improving Cash Flow - How do I improving Cash Flow? What the best way to improve it to another 100% growth YOY? Has anyone does this or achieved this using online marketing? Thanks, Roberts
Re: Improving Cash Flow - Thanks for your information. guide on how to avoid the problems of over trading. <-- Where is this guide? Any URL? guide on debt factoring and invoice discounting: the basics. <-- Where is this guide? Any URL? I just want to learn more about this. I am also looking for a good article on: What exactly is Cash Flow? Ways to improve cash flow at individual level and organizational level? I think it is a problem of thinking and mind sets problem. If we can change the way of spending, we can have more Cash. Robert
Re: Two Useful Books To Help You Focus On The CLIENT - Hi David, To add to your thread, I'd like to recommend Jonathan Tisch's "Chocolates On The Pillow Aren't Enough: Reinventing The Customer Experience". Tisch's book includes content on "Welcoming Customers", "The New Art of Customization", "The Challenges of Customer Diversity" and "Offering Something Extra to Your Customers" to name a few.
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