Effective cash flow management strategies for small businesses

To keep your small business's cash flow alive, you need smart management techniques.

Cash flow is the life blood of the Australian small business, and when that blood stops flowing, the organs are at risk of shutting down. There are many different methods for freeing up cash flow, but a significant number of the common ones either take a lot of time, aren't achievable or create extra risk – we're talking about applying for more bank loans, delaying growth plans, turning down work, or attempting to increase margins by either raising prices or cutting costs.

While these strategies could certainly help, there are more to consider before taking drastic action. Read these SME cash flow management techniques to see if any would work for you:

1. Trade credit insurance (TCI)

Trade credit insurance could be a life-saving product for any small business engaging in trade with overseas companies; it helps you manage risk and protects you from unforeseen failures with your trading partners.

With a TCI policy from a specialist such as COFACE, your partners will be evaluated for financial risk so you clearly understand and can predict any future payment issues that may arise when dealing with these organisations. In the event of a problem, TCI can also help you recover your funds through indemnification of the unpaid debts.

2. Invoice finance

Invoice finance (also known as factoring and debtor finance) has some crossover with TCI, and in fact many invoice factoring companies work with TCI organisations to provide their cover.

This is where you essentially sell your accounts receivable to a third party. Typically they would reimburse you for most of the invoice (minus a fee) and then chase the debt on your behalf. So where credit insurance is like taking out a policy against the risk of non-payment, invoice finance is like taking out a loan.

Many businesses prefer credit insurance as it can come as a part of a wider TCI package and is quite a bit more proactive, but it's good to know your options.

3. Fast pay discounts

One strategy that works well for many Australians is offering small discounts for fast payments. A common example of this is known as '1/10, Net 30'. This formula tells us what discount is being offered within how many days, and what due date the invoice will revert to if that early payment is missed.

Specifically, the first number (1) represents the percentage discount you're offering customers for paying within a specific window, which is the second number (10 days). If they do not pay within 10 days, the total reverts back to the original until the due date (30 days).

The numbers are all interchangeable. You could offer 2/10 Net 30, 3/20 Net 60, or whatever suits your bottom line and incentivises customers.

4. Liquidate unnecessary assets

Liquidating assets is rarely plan A, but if you have old, unnecessary or simply idle equipment, selling it off now may be a smart way to gain a much-needed cash injection as plan B.

If you no longer require the asset, there is no harm to your business so this doesn't have to be a difficult decision. If you think you'll require the equipment in the future, investigate rental costs for the same goods – chances are that these daily fees will be negligible for any asset you don't use often.

In conclusion

There are many fast ways to gain extra cash flow while protecting yourself against trade credit risk, so long as you know what products to investigate. However, before making any decisions you should consult a financial professional and ensure it is the right move for your specific business needs.

To learn more about trade credit insurance for Australian SMEs specifically, contact the experts at COFACE today.