Cash flow problems are often treated as a sales problem. The business needs more customers, more orders or more revenue. Yet some businesses have a different issue.
They are generating sales at a healthy rate, but too much of their working capital sits in unpaid invoices. The longer customers take to settle, the more pressure falls on the cash available elsewhere in the business.
That pressure has a price. It can increase borrowing costs, restrict purchasing and limit how much cash can be put towards the next stage of growth.
For many businesses, the question is not whether customers will pay. It is what waiting costs in the meantime.
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The cost of waiting
Late payment affects more than the balance of a business bank account. It can force an owner to find other ways to fund ordinary expenses or pass up opportunities that require cash. The longer money remains tied up in invoices, the more pressure can build elsewhere in the business.
Interest on short-term borrowing
Short-term borrowing can bridge a temporary cash shortage, but the finance has a price.
Consider a business with R300,000 tied up in outstanding invoices. It needs R100,000 for stock and supplier commitments while those customers are still within their agreed payment terms. A short-term facility can provide the money, but interest is added to the cost of running the business.
That expense has nothing to do with the profitability of the underlying sale. The business has already earned the revenue. It is paying a separate financing cost because the cash has not yet been received.
Repeated cash shortages can make this more expensive over time. If the same pattern appears month after month, finance costs can become a regular business expense.
Discounts you cannot take
A supplier may offer a discount for prompt settlement. If a business has enough cash available, it can take the reduced price. If its funds are tied up in unpaid invoices, that saving may be unavailable.
One missed discount is unlikely to change a company’s finances. Repeated missed discounts are another matter.
The same principle applies to negotiated supplier pricing, bulk purchases and stock commitments. A business with cash available has greater scope to make purchasing decisions around price and timing.
A business waiting for customer payments may have to buy smaller quantities or pay standard terms. The result can be a higher cost base.
Orders you decline
One of the most expensive consequences of slow customer payment can be a sale that never happens.
A customer places an order. The margin looks attractive. The company has the capacity to fulfil it. The problem is the cash required to purchase stock or pay suppliers.
If the money is tied up in unpaid invoices, the business may have to postpone the order or decline it.
That decision can affect more than one transaction. A customer who cannot get stock when required may source it elsewhere. A delayed order can also disrupt production schedules and supplier arrangements.
For a growing company, this can create an awkward contradiction. Sales are coming in, but available cash restricts the company’s ability to accept more work.
Revenue growth, therefore, does not always translate into greater financial flexibility.
The hours spent chasing payment
There is a human cost too.
Someone has to monitor the debtor book. Someone checks which invoices are overdue, sends reminders and follows up on promised payment dates.
In a small business, that work may fall to the owner or a senior member of the team.
An hour spent chasing payment is an hour that could have been spent on sales, supplier negotiations, customer service or business development. If several customers require repeated follow-ups, the time involved can become substantial.
There is also an administrative burden around disputed invoices. Staff may need to resend documents, answer queries, confirm delivery details or track down purchase order numbers.
That work does not generate another sale. It consumes internal resources because money from an existing sale has yet to reach the bank.
When growth creates a bigger cash requirement
Fast sales growth can make the problem more pronounced.
A business may have secured new customers and increased its monthly turnover, yet find that its bank balance does not reflect the growth.
Higher sales can mean larger supplier accounts. More stock may be required. More deliveries may need to be funded. Payroll can rise as the business takes on additional staff.
The company can therefore become more profitable while also needing more working capital.
That is one reason cash flow needs attention alongside sales and profit. A profitable business can still encounter pressure when money leaves the bank sooner than it enters.
Waiting for customer payments may be manageable at one level of turnover. At a higher level, the same payment cycle can require substantially more working capital.
How invoice factoring changes the equation
With invoice factoring, a business can receive an advance against eligible unpaid invoices after they have been issued. The factoring provider then manages the collection process according to the agreed arrangement.
Invoice factoring is a form of working capital finance based on outstanding customer invoices. The business receives an advance against eligible invoices, then a factoring provider such as Geddes receives payment when the customer settles.
A typical arrangement works like this:
- The business supplies goods or services to a customer and issues an invoice.
- Eligible invoices are submitted to the factoring provider.
- The provider assesses the invoices and the relevant customers.
- An agreed percentage of the invoice value is advanced to the business.
- The customer pays the invoice according to the agreed payment terms.
- The remaining balance is paid to the business after applicable fees and charges.
That gives the business access to cash linked to completed sales without requiring the customer to settle first.
The exact advance rate, fees and terms vary according to the arrangement and the invoices involved. Those figures need to be assessed against the cost of the current cash flow gap.
For some businesses, the calculation can make sense when the cost of delayed payment is greater than the cost of accessing funds sooner.
The benefit is not simply having money available. Earlier access to cash can give the business more control over when it pays suppliers, purchases stock and takes on new work.