If you need to improve your cash flow, you have three options:
- Increase the cash receipts into your business
- Reduce the cash payments going out of your business
- Best of all, do both.
This article will focus on the first…
How To Increase Cash Receipts In A Cash Flow Forecast
First the basics:
What Cash Receipts Can A Business Have?
Compared to the many different types of payment, there are only a few potential receipts:
- Cash sales from selling products and services – these are sales made without having to give credit.
- Credit sales from selling products and services – these are sales where payment is delayed because of tradition and negotiation.
- Receipts in advance – you ask customers to make a commitment payment at the time of placing the order and at various stages during a big project.
- Receipts from asset sales – the proceeds from selling something of value that the business owns outside of its normal trade. This might be selling fixed assets like land and buildings, plant and machinery and motor vehicles.
- Loans received – money can be borrowed from a bank or other financial institution. The business owner or directors may make a loan as can a third party. Loans have to be paid back and interest is usually charged.
- Share capital issued – an investor makes a long term investment in a business without expectation of regular repayments.
Increasing Cash Receipts From Sales
There are three ways to increase cash receipts from the normal trading activity of the business:
- Speeding up payments.
- Selling more volume.
- Increasing sales prices so the same volume sold has a higher sales value.
Speeding Up Payments
Receipts In Advance
The fastest payment is to ask for receipts in advance (although you would ask customers to pay in advance from their perspective).
Cash Sales Receipts
If you can’t get a receipt in advance or even face asking for it, can you get cash immediately before despatch or on delivery. In this situation, the customer doesn’t have a gap between paying the money and receiving the product or service.
Payment might be made in notes and coins, cheques (checks) or through a payment system like PayPal.
A compromise form of this cash receipt is credit card sales. In this situation, you get the money from the credit card company quickly, the customer pays back at his or her convenience and the credit card company acts as the buffer in the middle.
Credit Sales Receipts
There are two issues with collecting the cash for sales made on credit accounts:
- the agreed credit period – when payment is due.
- getting the money on or around the agreed payment date.
Selling More Volume
This is venturing into the heart of sales and marketing but it’s a reminder that cash flow is a general management responsibility and doesn’t purely belong to the accounts or finance department.
It may be necessary to have a fire-sale to bring in some much needed cash to save a business.
Selling At Higher Prices
Increasing prices is an excellent way to increase profit and cash flow provided there is little sales volume lost from the price increase.
In a business that has a margin of 30%, for every extra £100 sold in volume, there will an extra £70 of costs. Both profit and cash flow increase slowly.
But for every £100 sales revenue increases from a price increase, there is no associated increase in cost.
I will be writing much more about how to increase prices. At the moment keep prices increases as an option in boosting your cash flow.
Cash Receipts From Asset Sales
Needs must when the business has a cash flow crisis.
The owner may prefer that the business owns rather than rents the property the business uses because he or she believes property prices increase over the long term.
A bank might lend 70% of the value of the property by using it as security for a loan or overdraft.
The business could get 100% by selling it and leasing it back.
Sometimes businesses acquire assets that aren’t used. Manufacturing companies are great at mothballing machines and I knew one business owner who was an engineer who used to buy machines at liquidation sales just in case they were every needed.
These excess machines create their own costs including a need for space and selling them can raise money.
Can the business borrow money it needs to cover a cash shortfall?
- From the business owners and managers
- From the bank and other financial institutions
- From friends and family
I’m not a fan of borrowing money.
Share Capital Investments
A longer term solution to a funding problem is to allow an investor to buy a share of the business. Since the business needs the money, it would issue new share capital rather than the business owner selling some of his or her existing share capital.
This brings a lot of other issues because many business owners are extremely reluctant to lose any kind of control over the business.
While it is risk money, and doesn’t require security and regular interest payments, the investor will require some kind of financial return, either in form of dividends from profit or a sale at a much higher value in the foreseeable future.
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