Walking the Fine Line of Cash Flow Survival

Walking the Fine Line of Cash Flow Survival

Accutrac Capital 01-Aug-2014 0 Comments

It's called cash flow because, when you're in business, cash is never static. Like the tide, it comes in and then it goes out. Unlike the tide, however, it's rarely as constant and dependable. Budgeting for and keeping a close eye on your cash flow can make the difference between surviving or being blind-sided by a sudden cash flow crisis. Two vital cash flow metrics to watch are collection days and payment days. If these two metrics are not aligned, you may want to consider invoice factoring (also known as invoice discounting) as a simple, cost effective solution to gain immediate access to cash. 

Collection days

Collection days (also known as average days in receivables) is a measure of how long it takes you to get paid. Understand that it's not the same as payment terms that you offer your customers. It's how long, on average, it takes for you to actual be paid.

For example, you may find that though you have 30 day terms for customers, in reality, due to some customers paying late, your actual average days in receivables may be 35.

Why is this number important? It gives a more accurate picture of how long you should predict it takes to be paid when you're budgeting and projecting cash flow. It's also a number to keep a weathered-eye on. The lower this number is, the better your cash flow situation. Seeing a steady rise in your collection days means that you need to re-evaluate your accounts receivable processes to get it back in line.

Payment days

Payment days is a measure of how long you wait to pay your vendors. Of course, there are some expenses and payables that aren't negotiable (payroll is due when it's due, no matter what). You can, however, negotiate payment terms with your vendors, the same way that your customers negotiate them with you. Ideally, your vendor terms should complement the terms you offer so that, as much as possible, you're not due to pay your vendors until after your customers have paid you. In practical application, however, they don't always jive. Sometimes a customer will pay late.

If a customer does pay late and cash flow is a challenge, consider negotiating a later payment with vendors. This is an area where you want to walk a fine line. Having a strong (and friendly) working relationship built upfront with each vendor, makes it an easier ask. However, there may come a time when you need to call in a favor with a vendor to help you through a business challenge. If you become the company that always pays late, the chances of getting that favor granted diminishes substantially.

Factoring to improve your cash flow

Even with the best of planning, sometimes cash still comes up short. When cash flow is a challenge and you need a simple and fast solution, consider factoring your accounts receivable invoices and freight bills with a factoring company. It's easier to obtain than a bank loan or traditional line of credit and you can get cash, usually within 24 hours of issuing an invoice.

For more information about factoring to create cash flow for your US trucking business, visit www.accutraccapital.com.

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