Staying in the black: Here's how to manage your debtors, creditors and inventory to stay cash healthy
One way to boost your business's cash flow is to improve the ratio of debtors to creditors. The idea is to keep the money in your bank account for longer and pay their money as late as possible. If the relationship is managed well, it becomes easier to negotiate longer payment terms.
The experts at the Practical Accountancy Loose Leaf
explain how to achieve this, fast.
How to improve your ratio of debtors to creditors
• Try to get satisfactory credit from suppliers and extend credit during cash shortage periods; and
• Keep good relations with regular and important suppliers.
If a supplier offers a discount for early debt payment, look if it's feasible to accept the discount.
Before you accept an early payment discount - do this calculation
Taking credit from suppliers is a normal feature of business. Nearly every company has some creditors waiting for payment.
Trade credit is a source of short-term finance because it helps keep working capital down. It's usually a cheap source of finance because suppliers don't often charge interest. But, trade credit will have a cost whenever you're offered a discount for early payment. Rather choose to take longer credit.
Make sure you calculate the cost of accepting an early payment discount. It can cost you more in the long term if you get it wrong.
Use this formula to calculate the cost of cash discounts:
d x 365
100 - d t
• d is the size of the discount (for a 5% discount, d = 5)
• t is the reduction in the payment period in days that would be necessary so that the early payment discount can be taken.
Put this fabulous advice into practice, so you can see a more robust business cash flow in the new year!