My last blog outlined several immediate strategies for improving cash flow. Yet, actively managing your working capital, changing sales terms, and cutting unnecessary expenses only goes so far. What more can be done if cash balances are still lagging?
Consider taking one of the following steps as well:
Accounts Receivable Factoring
Accounts receivable factoring is a service that allows businesses to sell an outstanding invoice to a third party. Typically, the third-party will buy an invoice for 70-90% of its total value. This “factor” takes control of the collection process, contacting the invoiced customer for payment. For businesses with creditworthy customers and large-value invoices, receivables financing can be a low-risk way to free up cash.
While not a viable option for some small businesses, another way to free up cash is to enter into a sale leaseback agreement, typically involving real estate or an equipment asset. As the name suggests, the transaction involves selling an asset to someone else, then leasing it back, typically for a long duration. The business continues to use a vital asset but no longer owns it.
Controlling labor expenses is a critical cash management task. Labor costs vary by industry but for most small businesses range from 20% to 35% of sales. Since changing a business’s employee compensation or staffing structure takes time, a first step is to break old habits. Don’t rush to hire a replacement for that departing worker. Consider these alternatives first:
Staffing agencies are costly but, in the short term, allow you to vet workers before making a full-time hiring commitment. In some cases, one finds that a role formally considered to be full-time can be handled effectively on a part time basis.
Contractors vs. Employees
Worldwide Local Connect (WWLC) has clients that have significantly reduced their labor expenses by subcontracting work, often to overseas firms. This works best for project related work.
Alternative Pay Structures
It’s tempting to offer the same old pay structure to new employees: Straight salary or hourly wages. Many cash constrained small businesses take a more creative approach. They offer equity incentives to offset below market salaries or, perhaps, higher commissions coupled with lower base pay.
These and other measures, such as leasing rather than buying equipment, can improve cash flow. Should these steps prove insufficient, WWLC also helps businesses apply for bank lines or to seek out private investors. Contact us to learn more.