Raising Capital

Discounts

When you've decided to let your clients or customers pay you after you've delivered a product or service to them (instead of before), it may be in your interest to give them a bit of extra motivation to pay their bills more quickly. Faster payment by your customers improves cash flow for you.

One of the most common ways of motivating customers to pay more quickly is giving them a discount for prompt payment. This discount typically from 0.5 percent to 2 percent for payment in 10 to 20 days is negotiable and at your discretion. When you want to give it a try to see whether a prompt payment will improve your cash flow, start by offering the smallest possible percentage say, 0.5 percent for payment in 10 days. If this offer doesn't nudge your customers into making quicker payments, consider edging up your discount until they respond.

Try not to get carried away with prompt payment discounts. Is it going to be worth giving your clients 5 percent off their invoices when you can get your cash only a few days sooner? Probably not. Be sure to carefully analyze the impact of prompt-payment discounts on your financial position by calculating the equivalent interest rates for the discounts before you implement them, not after.

Budgeting

Although cash flow can be predicted to some degree, an element of uncertainty always remains. A client may decide to pay late, your company may have a major unanticipated expense, or a key customer may go bankrupt and default on payments for a substantial order. In this uncertain world, creating a cash budget is a good idea, because you can use it to anticipate your cash flows into the future.

A cash budget is an estimate of a company's cash position for a particular period a week, a month, or any period that you decide to track. Use your current cash position as the baseline for your report, and then project all cash in (payments from customers or other sources) and all cash out (payments to vendors, employees, and other entities), noted by date and amount.

Have a long-term cash budget of six to twelve months as a reference and overall guide. Manage your business, however, with a rolling four-to-eight week cash budget. Update your short-term budget at least monthly. After you lay out your cash flows during the period that you've selected, you can manage your cash much more easily, making intelligent decisions about when to make payments and when to avoid making them and other cash management issues.