Cash flow management is a crucial part of running a business. Keeping track of your outgoings and income can help you understand your business’s cash flow pattern, and identify potential gaps early on. In this case, maintaining healthy cash flow levels comes down to a simple rule: reduce your expenses or increase the money coming into your business.
However, reducing your outgoings is easier said than done. So, if you find yourself in a tricky cash flow situation, you could try to maximise available cash when you need it. Let’s take a look at the areas you can tackle for better cash flow, and what options there are to help you keep your cash flow steady.
Look at the bigger picture
Fundamentally, good cash flow management means you can easily pursue opportunities that wouldn’t be possible otherwise. But, every business is different and will have different requirements to boost cash flow. Alternative business finance could give you several different options for how to tackle cash flow management.
Some business owners may look at finance for cash flow as a simple cause and effect, but using finance for better cash flow can lead to a positive chain reaction. Let’s say you use funding to purchase a new vehicle for your company. This means you can make the purchase without reducing your working capital. You may then be able to hire a new member of staff, and therefore serve more customers.
Or maybe you need to pay a VAT bill, but your working capital isn’t sufficient. Using finance for your tax payment is nothing to be shy about. It can even have some positive effects: interest payments on a VAT loan are accounted for as operating costs, which means they can be offset against profit and reduce your next tax bill.
Big projects, restrained cash flow?
Maybe you know the following scenario: a business lands a new job that’s larger than usual. This is a great opportunity for the business to grow and establish the relationship with an important customer. However, on the flip side it means the business may be struggling with cash flow gaps. A lot of upfront costs could leave the business with larger expenses than usual, and long payment terms.
In this case a short-term business loan could help you take on the new project without restraining your cash flow. This kind of loan is usually unsecured which means you won’t need any collateral. Instead, the lender will look at your trading history and may ask you to give a personal guarantee.
If you have a wholesale business with a big customer, you’ll probably have to order a lot of stock from your supplier. In order to maintain steady cash flow, you shouldn’t overstretch yourself by spending money you don’t have. Trade finance can help you bridge the gap at the beginning of the long pay cycle. It’s based on confirmed purchase orders, so the lender will pay your supplier directly. Once the goods have been shipped and you’ve invoiced your customer, they pay the trade finance provider, and you won’t be left high and dry.
Have a Plan B for cash flow emergencies
Cash flow gaps are a common reason why many businesses struggle. While cash flow can be squeezed for growth, it can also occur because of seasonal business or payment terms of up to 90 days. However, there are a number of funding options that can help you get through a tough time.
If you’re waiting for customers to settle your invoices, invoice finance can help you bridge the cash flow gap. This type of finance unlocks cash from unpaid invoices. The lender will give you an advance of around 80% of the value of your invoices. Once you have been paid by your customers, you’ll receive the rest of the money minus the lender’s fees.
Perhaps you have occasional cash flow bumps, because your business is going through seasonal fluctuation, for example. In this case a revolving credit facility could be a good option. It’s similar to a business overdraft: you’ll get a pre-approved credit limit from which you can draw down funds whenever you need. It can provide you a useful safety net for cash flow emergencies like unexpected bills, for example.
There may be some ups and downs when it comes to cash flow, but that’s simply part of running a business. It’s important to remember that identifying potential cash flow gaps early on can help you prevent tough times.
Every business is different, so a funding option that’s really useful for one company might not be suitable for another one. If you need help to find your best finance option for healthy cash flow, Funding Options can help you with the search.
Conrad Ford is founder and CEO of Funding Options, the online marketplace for businesses finance. Funding Options is helping the small walk tall. Funding Options helps businesses find the right funding for their situation — whether they want to grow, they’re fighting for survival, or simply need to pay a tax bill. @FundingOptions