6 tips for optimizing cash flow

1.   Shorten your real payment period (DSO)

DSO (days sales outstanding) is the real payment period within which customers pay their outstanding invoices. In Belgium, the average figure is 66 days. Invoices that are over 120 days overdue push up your average DSO considerably.

Suppose you have a real payment period of 45 days. Now imagine that over 30% of your invoices are paid after 120 days. That will push up your DSO by 27 days.

If the customer fails to pay, Euler Hermes will pay compensation of 90% of the invoice value. There are plenty of advantages to lowering your DSO. It increases your working capital. It also gives you more freedom to put available funds to good use, for instance by reducing bank debt, paying your suppliers faster, or making more purchases.

Describe and automate the monitoring of your customers in a credit management policy. That way, customers will pay faster and your internal monitoring will run much more efficiently and effectively.

Click here to see the DSO for your industry

2.   Maximize supplier credit

A financially healthy business can obtain financing for cash payment discounts, ideally at a cost that is lower than the cash payment discount. Under such “reverse factoring” arrangements, suppliers are paid early by a factor.

Of course, you can choose to negotiate longer payment terms instead. This is a tried-and-tested strategy, but it is not always possible in practice.

3.   Screen your prospects

Always start monitoring your debtors in the prospecting phase, and focus on prospects with a good payment history. However, when you’re assessing potential new customers, you can’t rely on your own records – your best option is to involve an external adviser.

Test your customers’ financial health for free and without commitment

4.   Discuss payment terms with your customers

Reach clear agreements about feasible payment periods, and make sure that they are simple to track. That way, you’ll be in a better position to match your cash planning to your future outgoings.

For example: 15 days EOM + 10 days (or just: 10th day of the following month)

Payments are often carried out once a month. If you know what day that will be, you can agree it as the payment date. You should also anticipate and prevent possible reasons for non-payment. For instance, send a copy invoice one week before the due date.

5.   Increase efficiency by selling your smaller receivables

According to Pareto, 80% of customers represent 20% of revenue. By collecting and tracking payments from that 80%, you can boost your working capital in the short term and save a huge amount of time for your business.

With a Single Invoice Finance platform, you can decide yourself which outstanding invoices you want to finance (i.e. sell) and when. The platform will buy your invoice and send you the invoice purchase price within 72 hours.

Click here for more information

6.   Externalize your bank guarantees

Bank guarantees can be demanded by public-sector buyers, needed in connection with construction or other projects, or required by law. Guarantees require a cash pledge. Ninety per cent of businesses go to their regular bank for this service, and the bank then acts as guarantor.

Financially healthy businesses can normally use their available loan facilities to cover guarantees. A guarantee usually stays in place for 24 months. But this ties up part of your loan facility, leaving you unable to fully use it for short-term financing needs such as paying suppliers, granting payment extensions to customers, and so on. Euler Hermes offers worldwide guarantees on highly competitive terms.

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