How can my suppliers assist if I have a cash flow problem?
Suppliers can help improve your cash flow by supplying you with goods on credit. This helps by allowing you to buy goods and only pay for them at a later date.
In a best case scenario, you will be able to sell these goods and be paid for the goods you sold, before you have to pay your supplier, but more about this later.
While credit from suppliers can help cash flow, it is important to identify the actual cause of the cash flow problem so that corrective action can be taken. Possible causes of cash flow problems can include one or more of the following:
- Insufficient capital – capital consists of funds raised from shareholders and loans. A business needs sufficient capital to fund fixed assets and working capital (stock, debtors and creditors).
- Growing too quickly – a business which grows too quickly can often not have sufficient capital to fund the growth.
- An unprofitable business – does not make sufficient profit from the sale of its products to cover its fixed costs (rent, electricity, salaries etc). The net result is that the business is unprofitable and will run into cash flow problems.
- Poor working capital management – working capital consists of stock, debtors and creditors. If a business holds too much inventory, grants excessive credit thus incurring bad debts and does not receive payment from its debtors on time, it will soon run into cash flow problems.
Good working capital management is critical to a business. The objective of working capital management is to reduce the cash cycle.
Reducing the cash cycle is achieved by:
- Reducing inventory/ stock days – reducing the time between buying and selling inventory.
- Reducing receivables/ debtor days – reducing the time between selling inventory and receiving payment for the sale.
- Extending payables/ creditor days – extending the time between purchasing and paying for the purchased inventory.
Payables management, extend payables by:
- Negotiating better terms with your suppliers, and
- Delaying payment without losing supplier goodwill or trade discounts.
At the same time, cash discounts are usually attractive and if possible, it is worth taking advantage of them.