Cash flow – Why it means so much for businesses

by Josh Biggs in Finance on 18th September 2018

Within business, simply, cash is key. It doesn’t matter if you rule the marketplace, you’re a big hitter or you are starting fresh, cash flow is one of the most critical parts of any business. If your sales are good or bad, it doesn’t matter, if there isn’t a good amount of money flowing throughout the business, then naturally it will just fail. Even if profits have been strong, the business could still incur bad debts, have some late invoices and then the business gets into a negative spiral of just keeping their head above water, with cash flow plummeting.

There are ways of preparing businesses to handle cash flow better, as well as finding ways of tackling the issues when they trouble the business.

Identifying the common causes of cash flow problems

One of the most common causes of cash flow troubles, comes down to a lack of planning. Creating and updating a cash flow forecast is a hugely important part of preparation for a business. It must include all the financial aspects of the business, with every bit of detail involved. All incomings, outgoings and potential long-term effects of paying loans, and quarterly or yearly tax bills. How long will it take to pay off long term loans? Any business which relies on seasonal variations will need to make sure they have enough cash in reserve to survive quieter months.

A key issue when it comes to cash flow, is having clients who pay on time. If invoices are paid in late, it slows down the whole process of how the business operates. Even if there are lots of sales coming in, unless the invoices get paid on time a business will struggle to stay afloat and to maintain its level of cashflow.

Make the most out of incomings and outgoings

Businesses need to be constantly planning and properly updating their cash flow. There are some efficient ways of maximising money coming in and out of the business to ease pressure on your cash flow. Although it might seem like a simple task, staying on top of finances within the business is much harder than it may seem.

So, what are the best ways of being efficient incomings and outgoings?

  • Make sure your background checks are carried out on your clients, importantly assessing their credit history.
  • Be assertive with clients, if necessary, follow up on any clients who pay late.
  • Instead of collecting full payments, make it the business norm to collect up front deposits from clients.
  • Make full use of the businesses own outgoing repayments terms. If it helps to manage cash flow that bit better, pay on the last day of a 30-day contract.
  • If the business has regular suppliers, yet the business is struggling with cash flow, make sure you communicate with them and try to organise a later payment date.

By carrying out credit checks on customers, you are giving yourself the best indication as to how likely they are to pay their invoices. Credit checks are easy to carry out and will give you a good idea as to how good your potential clients are with making payments. Even if your client has a good credit rating, it doesn’t guarantee success, so when a client doesn’t pay on time, there is nothing wrong with asking for what you’re owed. This doesn’t mean being overly aggressive simply a phone call or an email.

The quicker money gets into the business the easier it is to maintain a healthy level of cash. This is why deposits can be a huge boost for a business. It makes outgoing payments that bit easier and although initially business could be hesitant, it should make it easier for them to pay.

In terms of your own outgoing payments. If you need too, then be smart with that money and take full advantage of your own repayment terms. If it would be useful for your business to pay at the end of the month, then make use of that option.

The business is already struggling with cashflow, what should I do?

If things are already going wrong and cash flow is seriously suffering, it might seem practically impossible to get out of trouble. Thankfully, there are things which can be done, depending on the sort of reasons the business might be having issues.

For B2B businesses who are struggling with cash flow, invoice finance can be an excellent method of steadying the ship. If it’s late paying clients who are causing issues, invoice finance effectively allows a business to obtain an advance which is based upon the value of those invoices. A factoring company will lend you up to around 90% of the invoices value, after first assessing the quality of the invoices and the potential risks involved. If everything is ok, the factoring company will forward you the cash, before collecting it from the client, taking the money that they are owed along with their fees and then returning the change.

If it is issues with creditors and constantly having to make loan repayments. A pre-pack administration could be a good way to move forward, as it enables you to get settled and work out what parts of the business can be saved. It is a formal procedure, which can only be put into place if the business has genuine, viable future.

Bank loans are another solution, however, these are normally last case scenario. A bank would be hesitant to loan to a business which is having cash flow trouble, as it may suggest that the business simply doesn’t work. If a business could prove that the model is viable and they’ve simply had bad luck, then sometimes banks would be willing to loan.

 

 

 

Categories: Finance

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