Having a small business has its advantages and disadvantages, as we know that managing it takes a lot of discipline and hard work. Knowing how to manage the business finances is the main thing that keeps the organisation afloat.
Small business owners who are experiencing cash flow challenges should consider improving efficiencies in their payments collection and processing methods to free up working capital.
This according to Vaughan David, CEO of business savings and cash investments at FNB, who recently looked at the cost-effective measures of managing payments through accepting or offering discounts for early invoice payments.
According to David, this usually entails an agreement being entered into between supplier/vendors and businesses to benefit from discounts from early settlement of invoices for goods or services rendered.
He adds that discounts can range from 10 percent upwards, for payments made within a stipulated number of days of receiving the invoice.
“SMEs have an opportunity to leverage early invoice payment discounts both from a supplier/vendor and customer perspective. This would enable the business to receive invoice discounts while also accepting early invoice payments from its customers,” he explains.
David adds that the advantages of accepting early invoice payments can be broken down into two categories:
Long-term strategy – He notes that the decision to make early payments should not be viewed from a short-term perspective, but rather SMEs should consider the monetary impact of the discount over a long period.
Trust – Davids says that consistently paying suppliers on time will help SMEs build trust and stronger relationships, which will come in handy when the business is experiencing financial challenges and needs to make special payment arrangements with suppliers or vendors.
Operating costs – Early invoice payment discounts are an effective way of cutting costs while helping the business to free up cash flow and increase profits, he adds.
Accepting early payments
Avoiding late payments – David advises that late payments can have a severe consequences for small business which is experiencing difficulties. Cash locked invoices can impact the business ability to manage operations while processing new orders such as paying staff or paying for stock.
Non-payment – offering discounts for early invoice payments can further protect SMEs from non-payment.
New opportunities – He says that a business that has cash in hand can gain a competitive edge by being flexible enough to take advantage of new opportunities in the market.
Potential to earn interest – businesses with positive cash flow have an opportunity to earn interest by keeping funds from early payments in an investment account, he said.
“Early invoice payment discounts impact SMEs differently based on the type of business and nature of their operations. It is therefore essential to thoroughly assess your operations as well as cash flow requirements to determine a suitable strategy that will benefit your business in the long-term,” concludes David.[Image – CC 0 Pixabay]