How to Protect Your Business Capital

With the current economic environment, your small business may be having a tough time meeting cash commitments and protecting cash reserves. These tips can help.

A business can survive for a short time without sales or profits, but not without a positive cash balance. After all, it’s cash that pays the bills and allows operations to continue. If you’re growing and extending credit to more customers, the need for cash can be even greater.

As the coronavirus pandemic continues to wreak havoc on the economy, it’s easy to feel like the situation is out of your hands. However, there are proactive steps you can take to shore up your capital and reduce the chances that you’ll run out of cash.

Reduce operating costs

There are probably a number of expenses in your business that you could do without, including:

• Subscriptions to software you don’t need
• Advertising costs that don’t relate directly to sales.

You might also consider switching to more basic service plans, reducing any excess inventory, or taking on tasks that you can do internally like cleaning or maintenance. For more ideas of what could be cut, go through your last few months of invoices and credit card statements (yours and your employees).

Invoice immediately

• Make sure all your work is invoiced for as soon as possible. With larger customers, try to get into their payment cycle or apply to be an approved supplier.
• If you’re asked to do more than the original quote, then be sure to negotiate additional payments—just make sure to specify in the initial sales contract exactly what you’ll deliver. If you go above and beyond, you need to be compensated for that as well.
• If you haven’t already, sign up for accounting software to make it easier to send invoice reminders.

Raise cash quickly

If you need to improve your cash flow temporarily, consider adjusting your sales and marketing plans to bring in cash sooner rather than later.

• Boost sales by offering customers incentives to purchase in advance
• Offer early-payment incentives such as discounts
• Focus marketing on short-term lead generation rather than longer-term objectives like brand recognition. Be aware that short-term incentives should be just that: short term. Offering discounts and incentives to ease your cash flow is fine, but know it erodes your profit.

Request progress payments

When negotiating new contracts with customers, set payment terms that help your cash flow, such as deposits or progress payments.

• Negotiate stage payments for contracts that take a long time to complete
• Include a regular timetable for the customer to pay invoices as part of any agreement
• Agree on clear milestones for the work to be completed to minimize the chance of the customer disputing any invoices.

Manage inventory carefully

If you hold inventory, then tighter controls can release substantial sums of money:

• Aim to hold just enough to service your customers on an ongoing basis, taking into account seasonal peaks and troughs
• Set a target stock-turn, then monitor your performance
• If possible, make suppliers your warehouse and let them bear most of the inventory holding costs by buying only when you need new stock.
• Sell off any slow moving, old or obsolete inventory to raise extra cash. There are great software options to help manage your inventory.

Credit Control

An efficient credit control system speeds up your cash collection and reduces bad debt. Some suggestions:

• Credit-check all customers before you extend credit terms
• Control how much credit you provide and to which customers. Consider using credit scoring systems and setting appropriate credit limits for all customers.
• Avoid giving any customer more credit than you could afford to lose if the sale turned into a bad debt
• Send out invoices immediately after you’ve supplied the goods or service. Confirm that all the invoice details were correct and that there will be no problem paying it by the due date.
• Monitor late payments and make collection efforts methodically, starting largest debtors first
• If you intend to charge interest on late payments, make sure it’s stated in your terms of trade.

New funding

If you do need extra funding to get you through a rough patch, then take full advantage of the different types of finance available:

• Speak to the small business experts at Umpqua about the various types of finance available to your business
• The CARES Act provides funding relief for small businesses via an SBA 7(a) loan. Umpqua is working with customers and non-customers to provide this funding. Learn more.
• The SBA has a wide range of disaster loans available
• Consider asset finance instead of using up your cash reserves to purchase computers, vehicles, or equipment.
• In some cases, you may even need to contribute additional cash of your own to keep the business afloat until operations can return to normal.

However you choose to weather the COVID-19 crisis, remember that you’re not in it alone. As always, Umpqua is here to help any way that we can. For advice and assistance, feel free to contact us any time.