The uncertain and ever-changing events from the COVID-19 pandemic are impacting businesses in unpredictable ways. Consumers are changing their buying habits and spending less money on non-essential companies than pre-pandemic. Maintaining adequate cash flow to sustain a business’s successful operations is a lot harder, and many companies are at risk. Even in a time of social distancing and cash flow problems, there are ways for large and small business owners to manage their cash flow to minimize interrupting the normal flow of their business operations and keep their doors open.
Understanding cash flow and managing it is the key to success, especially for small businesses. Business cash flow is the cash that is coming in and going out of your business. If a business’s cash flow is positive, more money is coming in from customers than the company is spending on expenses. On the other hand, if the cash flow shows the amount going out is more than the cash coming in, cash flow management needs to be improved.
The COVID-19 pandemic has presented businesses with the need to manage their cash flow more effectively. Some companies experience a surplus in demand and do not have enough cash to cover restock as customer payment terms are extended. On the other side of things, some businesses have cash flow problems as their profit margin decreases because they aren’t selling their products and don’t have the cash to cover their expenses. In both situations, cash flow management needs to be improved. We are here to help you do that.
How can I manage my business’s cash flow?
The COVID-19 pandemic has slowed payment terms from customers, which has a massive impact on cash flow problems. Getting paid on time is a way to improve a business’s financial management. For a company to pay their bills and stay on top of expenses, they need to have an adequate amount of cash on hand to cover these costs. Getting a credit line or loan from a bank or traditional lender to cover these costs will take the time that most businesses don’t have.
A successful way to manage a business’s cash flow is through invoice factoring or accounts receivable financing. It has a quicker approval process than a traditional lender loan, typically same day approval. Invoice factoring bridges the gap between slow payment terms and a cash flow shortage. This can be a short term or long term solution for businesses to stay on top of their cash flow statements. Since this is not a loan, there are no accounts payable from you.
How does invoice financing work?
Invoice financing, also known as invoice factoring, works when the factor purchases the outstanding invoices of a business and advances them 80-95% of the money upfront, typically within 24 hours. The business sends its invoices to the invoice factoring company, receives the invoice amount upfront, and then the factor waits for the customer to pay them at the end of the agreed-upon payment terms. Once the factor has received full payment of the invoice, they will send their client the remaining cash balance, minus the factoring fee. An invoice factoring company like Porter will approve you the same day, and you can start factoring your invoices immediately, improving your cash flow right away.
Things to consider when managing cash flow in uncertain times
Payment terms are a crucial factor when managing cash flow. COVID-19 is delaying payments due to customers’ cash flow being short, and you may be wondering if you should still be offering payment terms to your customers. The answer is yes. Even if customers are extending terms, an original pay term still needs to be in the agreement. Invoice factoring will act as the middleman between the delayed terms and consistent cash flow, but the agreement needs to be there for the invoice factor to get paid, and in turn, you get paid.
Another thing to consider during these uncertain times is credit checking your customers. Working with a bad debtor could seriously hurt your company, and it could be what puts you out of business. If a customer does not pay the factor for the invoice within the agreed-upon payment terms, the payment will fall back on your company. At Porter, we credit check customers before working with them, to avoid putting ourselves and your business in a position of losing money.
Credit insurance is also essential to consider. Since the pandemic is hitting businesses and industries differently, it is hard to know who is struggling financially and potentially going out of business. Having credit insurance on customers is extremely important, now more than ever. Typically, an invoice factoring company will have credit insurance in place on your customers to ensure that everyone gets paid. This secures the factoring company and your business.
If you have faced some hard times during this pandemic and need some help with managing your business’s cash flow, get in touch with us today!
(205) 397-1240 or get a free quote here.