Managing cash flow and fuelling growth are two significant priorities in any business.
Cash flow is fundamental to meeting your financial commitments consistently and minimising disruption. Growth enhances performance, drives revenue and reputation and improves your market position.
However, cash flow has implications for growth and vice versa. Growth requires investment into your company that restricts cash flow as your costs steadily rise.
You need to strike the perfect balance for long-term resilience and fulfilment of your goals. This guide explores how to do so and why it matters.
The relationship between cash flow and growth
Positive cash flow is a vital indicator of solid business performance. It suggests you have the demand to bring in revenue and good cost management, which will make scaling easier.
However, growth requires substantial capital, usually spent on assets and equipment, raw materials, staff salaries, innovation and other costs. As a result, your expenses will increase, and cash flow will tighten.
The hope is that these costs will be counteracted by higher revenue as the impact of your growth tactics take effect and bring in customers. These results take time and cash flow may be hit in the interim.
The risk doesn’t mean you should forgo growth. Growth is crucial for long-term success and resilience – but so is cash flow. You need it to fulfil your financial commitments, including paying suppliers, staff and bills on time.
If your cash flow slows, there is the risk it could derail your growth plans before they come to fruition.
That is why it is essential to maintain the balance between cash flow and growth for the best results.
Forms of funding that balance cash flow and growth
Managing cash flow and growth simultaneously is quite a challenge. Fortunately, there are a range of external finance solutions designed to support both. We list them below.
Invoice finance
Invoice finance is a tool for improving cash flow, allowing SMEs to unlock capital from unpaid customer invoices.
It’s really helpful when pursuing growth. The issue of late payment plagues over 50% of businesses. By reducing this threat, more time can be devoted to expanding your company. It also improves cash flow which is essential when scaling.
An invoice finance facility will grow with your business. It means that as you bring in new customers, you can minimise the risk of payment issues and the subsequent tightening of cash flow.
Commercial loans
Loans are frequently used to raise capital for expansion, amongst other uses. Banks and alternative lenders will offer you varying amounts depending on your ability to repay the loan based on your previous financial performance and future forecasts.
By securing a loan, you will have the money you need to achieve your goals and supplement any cash reserves.
The term of your loan will vary from three to five years typically.
Equity funding
Another common source of growth finance is equity funding. Provided you have promising growth potential, investors will be happy to invest in your company in exchange for shares.
They aim to get a high rate of return on their investment. If this is pure equity, there will be no impact on cash flow as it does not have to be repaid. It is worth noting that some larger investors will include loan notes within their investment and these will have an interest rate attached to them.
If you are willing to give up equity in your company and find suitable investors, it’s an excellent way to finance growth without negatively impacting cash flow.
Leasing
Often, expanding operations means acquiring more assets – plant & machinery, equipment, company vehicles, etc. These may involve a substantial investment.
A method of preserving cash reserves and lessening the impact on cash flow is to use leasing or hire purchase solutions which allow you to pay a smaller deposit and spread the remaining cost over a two to five year period with interest.
By breaking the cost into manageable instalments, it’s easier to maintain cash flow while acquiring the asset you need to grow and drive demand.
Trade finance
Another common way to grow a business is to trade in goods or services internationally. Importing gives you access to a broader range of resources, strengthening your supply chain and improving quality. Exporting enables you to maximise your sales potential by serving customers globally.
Of course, trade also increases the associated costs due to the administration required, as well as any fees related with any currency exposures that you have. This may have ramifications for your cash flow.
Trade finance, normally coupled with invoice finance, aims to ease the strain by closing the funding gap between customer and supplier. If you are importing supplies to fulfil an order in the UK, it provides funding to buy the resources you need while awaiting customer payments. Exporting enables you to undertake the expenses required to process the orders in the UK before your customer abroad pays.
80% of world trade is funded through trade finance. It makes importing and exporting accessible while taking your business into a global marketplace to grow sales and revenue.
Conclusion
Most businesses will want to grow. However, these ambitions often get left behind in the mission to manage cash flow.
While keeping working capital available is crucial to success and productivity, it doesn’t mean you can’t expand too.
By creating a balance between cash flow and growth, you will achieve your ambitions while staying on top of your commitments. External solutions make the process more achievable, providing you with the funds you need to move forward without draining your business finances.
If you are pursuing growth goals, we will work with you to create a strategy that minimises cash flow disruption. We’ll also pinpoint appropriate funding sources to ease pressures while moving your company forward.