There are proactive steps that you can take to ensure that your working capital remains as high as possible. Considering these steps will be particularly important if you’ve been investing in growth a lot over the last number of years or your business is not yet profitable.
Firstly, let’s look at how you are managing your debtors. Those who owe (or will owe) money to your business are a good first port of call for shoring up your cash on hand.
Credit control and chasing late payments
The first and most obvious place to start is to increase your focus on credit control. Now is a great time to check what invoices are outstanding and what might be owed to you. Prioritize chasing those who are outside of their credit terms for immediate payment and perhaps think about sending increased reminders as payments approach the due date. In general during this time you need to increase the monitoring of your invoices and payments. Increase your accounts reconciliation cycle, increase your billing frequency, increase your reminders. The name of the game is: increase your monitoring to increase your cash.
Late penalties and fees
In a similar vein, it’s now time to start thinking about late payment penalties. Personally, I’ve never been too draconian with this and have only once had to use the ‘threat’ of late penalties to encourage payment but it’s worth considering. Check out what your countries legislation allows you to apply in terms of late penalties and ensure that clients know that there will be penalties for late payments. This is especially important if you’ve never used late fees before.
Now that the more unpleasant or stressful aspects of debtor management are out of the way there are some other ways you can proactively increase cash on hand.
Discounting to increase cash on hand
Are you in a position to offer early payment discounts to clients (or if you’re a physical goods company a ‘cash on delivery’ discount)? Using early payment discounts is a great example of a ‘double-win’. It benefits you because you’re increasing your cash on hand and it benefits your clients because they’re enjoying a mark-down on expected pricing.
Request early payments or renegotiate payment terms
Don’t forget that not every business is going through a challenging time in this climate. And, some cash-rich businesses may amenable to pay early even without a discount. Ultimately, if you don’t ask you don’t get.
One thing you should definitely consider doing though is assessing your payment terms. Find out what the typical payment cycles are for your industry and try and get close to them. When times are good it’s easy to relent on extremely long payment terms or simply pay no attention to them, but if you’re going through a period of needing to really actively manage your cash flow I’d strongly recommend looking at your payment terms and trying to negotiate them down.
Now that we’ve looked at managing debtors let’s turn attention to those that you might need to pay during this period — your creditors.
Request credit term extensions
Some of your suppliers might be willing to extend credit terms — even a simple extension from 30 days to 60 days could have a dramatic effect on your cash-flow management. It’s worth assessing what payment terms you are on with your suppliers at present and prioritizing the ones that would make a dramatic difference to your cash-flow.
Stop early repayments
If you are in the habit of paying invoices as soon as they arrive you might want to revisit that practice. Why not use the full credit-term available to you? In the short-term that money is better in your account than your suppliers’.
Assess the impact of late fees
Sometimes, taking a small hit on late fees might be worth it. The same way that the best way to manage a credit card is paying the balance in full there might be months where your cash-flow just isn’t working out that way and going with the lowest interest is the best way to manage debt (usually).
Prioritize business-critical payments
You’re managing your working capital to keep your business afloat. So, you want to make sure that it does stay afloat and if you have critical suppliers you need to make sure that they are paid so that they don’t cut off supply.
It might be too early to start backing out of new contracts, joint agreements and other things that will grow your business but one thing that you might want to consider is slowing new procurement. It doesn’t mean going quiet altogether but instead of rushing things through take your time and be really sure before you commit to new payment commitments or purchases.
Assess in-country governmental support
Many countries’ are putting together financial support packages for businesses. It’s really worth thinking about how your business might access these if it’s necessary.
Obtain or increase credit facilities
Similarly, many countries financial institutions are being prompted to increase lending facilities so if you’ve never had access to them before now might be the time. Speak to your bank about what might be available to you and remember that interest rates are falling so this might be a good time to consider credit.
Sale of non-essential assets
If you have assets that are non-essential or aren’t being used that are worth some money it’s a good time to start getting rid of them.
Leverage wholly-owned, unencumbered assets
If your business owns large, expensive assets (plant machinery, buildings, lots of stock, etc.) then you might be able to leverage these to raise debt at an even more competitive rate. Start thinking about what your assets might be worth and how you can raise finance secured against them. However, it’s important to consider that if you are raising debts against currently unencumbered assets that they are becoming even less liquid.
Communication is key
If your business is struggling the worst thing you can do is stay silent. Speak to suppliers, customers, debtors, creditors, investors, banks, etc. in an appropriate way. They might be in a position to help you.