Cash flow isn’t a single, isolated issue that affects all businesses in the same way. And it’s unlikely to just crop up once in a business’s life cycle. Nor is it planned for well in advance so that you can be prepared each time.
In fact, whilst good cash flow keeps your business going, poor cash flow alone can be its downfall and the reason why 25% of businesses don’t make it past the first year.
But despite all the things that it isn’t, cash flow (and the problems it brings) are a near certainty in most growing businesses.
The good news, however, is that cash flow dilemmas are generally solvable.
You just need to anticipate their likelihood at any one time and be prepared with possible solutions… and then hopefully they will disappear as quickly as they arrived.
We’ve outlined four of the most common cash flow dilemmas faced by most businesses at some point along with ways of dealing with each one:
- I’m overspending
It’s too easy to just go out and buy everything you think you need for your business, especially if you are in the start-up phase. This includes ‘essentials’ from machinery and equipment to stationery and software… And the chances are you will either spend unnecessarily or simply spend too much.
This may be because you don’t have the time and resource to shop around for the best deals, or you could be buying for the sake of it without really considering the priorities. Either way, an already tight cash flow is going to be put under immense strain if you are overspending with money you don’t really have.
Solution
You need to keep a tight control on all of the incomings and outgoings for your business, ideally detailed by day to give a more precise and actual overview. This should allow you to analyse all of your costs and identify the priorities that are fundamental to your business operations.
Accurate financial forecasting is paramount to knowing how much available capital you have for new purchases, but don’t sacrifice quality for a cheaper deal as this could have a negative effect on your business productivity. You should invest in things that are going to have the greatest positive impact on your business, particularly where a positive return is likely.
Funding option – Leasing and hire purchase
Funding that is secured against particular assets meaning you can spread your payments over a longer period. In leasing agreements, there is generally the option to own the asset at the end or simply hand it back.
- My customers pay late
Issuing a customer invoice is a great feeling but it means very little until the money is in your bank. For most businesses, late incoming payments can have a drastic impact on cash flow; many need to increase borrowing to cover the shortfall and some even have to turn away new business without the funds to facilitate it.
If the problem exists across a number of your customers then your cash flow position can get out of hand very quickly, especially if your financial forecasting and projected outgoings have a big dependency on the money coming in.
Solution
If your own customers are serial late payers, then reviewing your credit management processes could be extremely worthwhile. Any improvements you can make to get cash into your business quicker, and on time, will support a healthy cash flow going forward.
You need systems in place that are highly efficient to ensure that you know what is owed to you at all times. And you need to have the means to collect the payments quickly.
Read our blog ‘Your cashflow is only as good as your credit management’
Funding option – Invoice finance
Both factoring and discounting work on the basis of releasing funds that are held in unpaid customer invoices. You effectively raise finance against outstanding debt owed to you and this can be done on a single invoice, selective invoices or across your whole debtor book.
If the clients do not pay within the agreed facility limits, however, the funder will claw back the invoices that they have funded.
- I can’t afford to pay suppliers
When cash flow issues arise, one of the seemingly quick fix solutions is to ignore supplier invoices, but this will simply cost you even more in the long-run. The intention is to protect the cash you have but the irony is that in doing this, you could be fast accumulating interest on the outstanding amounts.
It may also hinder any credit prospects you once had because suppliers could be less lenient with payment terms and credit extensions in the future.
Solution
Always be open with suppliers about your current financial position as many will be able to accommodate a working solution. This may include a small payment extension or even a longer-term payment plan to allow for smaller amounts on a regular basis.
Funding option – Cash flow loans
A type of unsecured borrowing used to support day-to-day business operations. Loans are used to finance working capital such as payroll and rent and are paid back when incoming cash is available.
Funding option – Trade or Supplier Finance
A route that allows you to obtain funding for supplier invoices to enable you to fulfil your orders, particularly relevant when your business is experiencing growth.
- I need to fulfil a large order
Every business is looking for that large order but when it arrives unexpectedly, there are consequences in relation to fulfilling it. Do you have enough stock to meet the demand and are the resources in place to service the uplift in requirements?
It may also be the case that you are trading with this customer on agreed credit terms which means that you will need to deliver the order before receiving payment for it.
Solution
Determine exactly what you need to invest in to fulfil the order (and a potential increase in sales as a result) so that you can be clear whether your finance requirement is to plug a short or long-term funding gap.
You also need to calculate what you can realistically afford to pay back each month or whether an equity funding solution would better meet your needs at this time.
Funding option – Crowdfunding or peer-to-peer lending
Based on the concept of raising a sum of money by lots of people each investing small amounts, both debt and equity finance are covered by online lending platforms. You pitch your finance need and people invest according to personal interest, criteria or automatic matching – a potentially speedy solution.
Funding option – Trade or Supplier Finance
A route that allows you to obtain funding for supplier invoices to enable you to fulfil your orders, particularly relevant when your business is experiencing growth.
There are lots of challenges facing growing business every day, and inevitably the majority of them will have a negative impact on cashflow. The good news is that a cash flow solution can generally be found and the impact on a business can be short-term, but you need to find the right funding solution for your situation.
So, if you’re looking to grow your business but have cash flow issues to get under control first, speak to one of our advisers for some expert guidance on the best funding solution for your specific business requirements.