Regardless of how successful your business is, whether it is ticking along nicely, just starting out, or a bit hitter, cash is key. Without a healthy flow of cash throughout the business, naturally, it will struggle. It doesn’t matter how good your sales are or even your profits if cash flow isn’t right the business will fail. If the business incurs a few bad debts or has several late invoices, or even if seasonal variations are harder than expected it could put the business into a negative spiral of just staying above water.
Fortunately, there are ways in which a business can prepare themselves for cash flow troubles and, means of tackling the problems as and when they fall.
Identifying the problems
The majority of cash flow issues come down to a simple lack of planning. A cash flow forecast is essential preparation for any business, and it needs to be continually edited and updated. It must include all possible incomings and outgoings, without forgetting potential long-term effects, such as loan repayments, quarterly or yearly tax bills and seasonal variations in trade. This is the basis which a model must be modified around.
As well as planning efficiently, a business must identify potential flaws where it could suffer from with or cash flow, or times within the year when things are stretched. Understanding your clients, when and how they pay will help you plan for all eventualities.
Efficiency with incomings and outgoings
As a general rule of thumb, there are several practices a business can put into place to help maintain a good level of cash flow. The prospect of controlling money in and out of business appears simple and easy. However, in reality, it can be a much more difficult job.
So, what can you do?
- Carry out regular background and credit checks on your clients.
- Be assertive with clients and remind them if they pay late.
- Make it the business norm to collect upfront deposits from clients. Some money in, is better than none.
- If your business has regular suppliers, make sure you keep on good terms with them and if you are struggling cash flow wise, tell them about your troubles.
- Make the most out of your own repayment terms. If it will help the business to pay on the last day of a 30-day contract, make full use of it.
A client credit check should be step number one. This will give you the best indication as to how likely they are to pay or pay on time and most importantly it will allow you to decide if you want to trade with them. However, even late payers can still have a high credit score. There is nothing wrong with giving a client a gentle reminder about their financial responsibilities and asking them to pay up if they’re very late. It doesn’t mean being overly aggressive, an email or a phone call is better than nothing.
Deposits likewise can be hugely beneficial to easing cash flow troubles. The quicker that money comes into the business, the easier it makes outgoing payments. Clients might be hesitant at putting down a deposit, but if they can see the positive in splitting up their payments, it can make things easier for them too.
When it comes to outgoings within the business, it’s important to be smart when it comes to spending money. If it’s beneficial to take advantage of lengthy repayment terms, then use that option. Instead of paying immediately, work out the day which will benefit the business the most and ease cash flow.
My business is already struggling with cash flow, what can I do?
Depending on what situation you find yourself in, there are plenty of viable solutions which can help bring your business out of trouble.
Invoice finance
If the main cause of trouble is late paying clients, for B2B businesses, invoice finance is perhaps the most ideal solution. It’s an excellent method of steading the ship and bringing in the money you’re owed. Invoice finance is a financing option which effectively allows you to obtain an advance based upon the value of your late invoices. A factoring company will first assess your invoices, their quality, the potential risks and rewards involved. If everything is deemed ok, the factoring company will forward you the cash, typically up to 90% of the invoices value, before collecting the invoices money from your client, taking their fees and then returning the change. There are factoring rates involved, just like any finance deal, but these will generally be cheaper rates than the interest you would pay on a bank loan.
Formal repayment plan
If the business has suffered a bad debt and is struggling to keep up with loan repayments, there are formal repayment plans available such as a CVA. A procedure such as this would allow you to arrange a means of repaying your creditors slowly over time. The business pays a monthly fee towards their creditors based on what they can afford and removes the intense pressure that creditors can induce. However, creditors would have to agree to an option such as this and will only do so if the business has a genuinely viable future.
Asset finance
There are several different forms of asset finance, each with their own benefits which could prove valuable to your business. If your business needs new equipment or machinery, leasing or hire purchase are a great solution as they allow you to pay for the products over time, as opposed to spending one large lump sum which could disrupt cash flow. Alternatively, if you have lots of quality assets, but not any cash, you can take out loans based upon the value of your assets.
Bank loans
A more traditional option typically comes via a bank loan. However, these are normally last case scenarios. Having a bank loan accepted can be hard work and difficult, as banks will look heavily in the history of the business, the purpose of the loan and may require personal security. However, if a business can prove its model works and that things just haven’t gone entirely right, banks may be willing to loan.