To make any business successful, regardless of what sector you are in, you need to have a healthy flow of cash throughout the company. No matter how high your sales and profits are if you don’t have cash to deal with day to day tasks or to pay your overheads, inevitably the business will encounter problems. During your business planning, you may even know that at some point you will have difficult months and therefore be struggling to make cashflow ends meet. However, if you can predict these issues prior to starting the business, then preparing for them is absolutely key.
What are the most common causes of cashflow problems?
For most businesses, it’s timing. Every company must make their own ends meet and if customers don’t pay their invoices on time, it leads to owners being left shorthanded. Even if the business is seeing high sales, if the cash doesn’t come in quick enough ultimately you won’t be able to pay your expenses on time.
Sometimes cash flow issues can incur through no fault of your own. In business, anything can happen and you could unexpectedly end up with a large cost that puts you into trouble. Naturally businesses will pay off the impending overheads as quickly as possible, but keeping enough in reserve to pay quarterly or yearly tax bills needs to be considered.
Arguably the most common cause of having cash flow problems is through lack of planning. Planning a cashflow forecast, taking into account all incomings and outgoings is a huge part of your business preparation. An owner needs to consider all necessary start-up costs and the potential long-term effects it can have on cash flow, how long will it take to pay back that re-investment? Have I overspent on supplies or staff?
Another common mistake businesses make when thinking about cash flow, is not taking into consideration seasonal variations. Naturally some months will be more profitable than others, however, if you rely on summer months, or winter months making sure you have enough cash to survive for the remaining months is critical.
Be efficient with your incomings and outgoings
Aside from rigorous planning, there are simple things an owner can do to make sure there is a sufficient, healthy flow of cash throughout the business. Shoring up your incoming and doing everything you can to make sure that customers pay on time, seems obvious, but not enough businesses do it. Issuing an invoice to the customer immediately and then quickly following it up, is the most effective way of staying on top of your customers and making sure they pay within the agreed time.
Assessing your customers in the first place and seeing how likely they are to pay can be massively beneficial. Do a credit check on your customers and assess how efficient they have been at paying customers previously.
Another option, is making deposit payments your business norm. This can make cash flow forecasting easier as the business will get a certain percentage of invoices immediately. It can keep cash flowing more naturally throughout the business and stops you from constantly waiting for some form of payment.
In terms of maintaining your outgoings, taking advantage of longer repayments terms yourself can be an advantage. Break up your staff wages, utility bills and any overheads so that they run parallel to when the business will be paid.
What could you do if the business is already in trouble?
Sometimes getting into cash flow trouble simply cannot be helped. But what are the best possible solutions if you’re in trouble?
For B2b businesses, invoice financing can be a great option. This allows you to take out a loan, against the value of your invoices. A factoring company will first assess the quality of your invoices, before lending you a sum to help with your cash flow. They will then collect your invoice payments, take back what they are owed, along with their fees, before returning you any remaining cash. Not only does these give you additional cash to help with the business, it frees up more time for you to focus on other aspects of the company and carry out any usual duties.
A business overdraft can be a simple solution when you need help with cash flow. A business overdraft works just like a personal overdraft and it ensures you have funds available if your bank account goes overdrawn. The amount available will be agreed with the bank beforehand and is usually designed to meet the company needs as long as it is not deemed too large a risk by the bank.
Another option, would be to apply for a bank loan. These can be difficult to maintain, as banks have tightened up their criteria since the financial crisis, however, if you can prove that your business is genuinely viable and that a cash flow problem hasn’t been caused by bad trading, then you can secure a loan. The negative would be the time which is spent in applying for a loan as these can be a tiresome job, whilst you need to be working on the business.