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.
Vaughan David, CEO of Business Savings and Cash Investments at FNB says that one of the most cost-effective ways of managing payments is through accepting or offering discounts for early invoice payments. This usually entails an agreement entered into between suppliers/vendors and businesses to benefit from discounts from the early settlement of invoices for goods or services rendered. Discounts can range from 10% 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,” adds David.
He unpacks some of the key benefits of making and accepting early invoice payments:
- Long-term strategy – the decision to make early payments should not be viewed from a short-term perspective. SMEs should rather consider the monetary impact of the discounts over a longer period.
- Trust – consistently paying your suppliers on time helps you to build trust and stronger relationships. This often comes 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.
Accepting early payments
- Avoiding late payments – late payments can have severe consequences for a small business which is experiencing difficulties. Cash locked into invoices can impact the business’ ability to manage operations while processing new orders i.e. paying staff or paying for stock.
- Non-payment – offering discounts for early invoice payments can further protect SMEs from non-payment.
- New opportunities – 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.
“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 cashflow requirements to determine a suitable strategy that will benefit your business in the long-term,” concludes David.