Cash flow is the lifeblood of any business, and managing it effectively can mean the difference between make or break.
When we refer to cash flow management, we’re talking about making sure there is enough cash available to cover all your outgoing expenses. If your outgoings are more than your sales and you run out of cash to pay staff or suppliers, your business will risk insolvency.
Even if you’re profitable, good cash flow management requires effective forecasting for the longer term and preparing for any potential financial pressures, such as seasonal dips, a large order coming up or a need to invest in new equipment.
It’s also worth having a contingency plan in place that can kick in to protect cash flow in the event of unexpected or unforeseen financial pressures. This could include situations such as equipment breakdown, suppliers or customers going out of business, or the late payment of invoices.
Improving cash flow
The good news is there are several measures you can take to improve cash flow. Good cash flow management mainly comes down to having a solid grasp of your company’s income and outgoings, identifying any potential future risks, and ensuring plans are in place to tackle and prepare for this.
It often pays to make sure you are constantly reviewing all expenses and costs to ensure that;
a) they are still necessary and
b) you are getting good value for money.
It could be that shopping around for things like utilities, bank accounts and contracted services could save money and improve cash flow, and you may also have legacy payments for services that are no longer needed.
Credit control procedures are also a vital part of the cash flow process. Late payment of invoices and waiting to receive cash for services provided can be crippling to businesses, yet it continues to be a significant problem all over the UK.
Making sure you have robust credit control procedures in place is the first step towards mitigating this problem — and it might be as simple as setting up automatic invoice reminders.
How business finance can help improve cash flow
Once you have exhausted the operational changes that are within your power, there may still be external factors impacting your cash flow that are out of your control — or you might want to invest money in growing your business without risking your day-to-day cash. If that’s the case, there’s a range of funding options available that can help put the control firmly back in your hands.
Here’s a quick introduction to some of the funding options you might want to look at to help you maintain working levels of cash flow.
Unsecured business loans
If you need an injection of cash fast, either to seize an opportunity or to cover an unexpected cost, then an unsecured business loan could be an option.
If you are looking for an unsecured business loan, you will find that lenders generally place a greater emphasis on your trading history. You will probably be asked to provide a personal guarantee, but because there’s no security involved they can be arranged quickly.
It’s also worth noting that this flexibility usually means unsecured loans come at a higher cost.
As mentioned above, late payment of invoices can be a serious issue, especially if you only have a handful of clients. Some larger companies take up to 90 days to pay their suppliers, which can make it really difficult for smaller businesses — you don’t want to wait that long, but you don’t want to rock the boat and risk losing the business either.
Invoice finance is a really effective way of tackling this problem, by releasing the cash owed to you in unpaid invoices.
The lender takes the burden of the debt for you, so as soon as you raise an invoice, they forward you the majority of the money owed (usually around 85%). When the invoice is settled by the customer, the lender will forward you the rest of the money minus their fee.
Revolving credit facilities
If your funding needs are a bit less predictable, revolving credit facilities can work well when you need extra cash for the short-term.
Revolving credit facilities are a rolling agreement, so they’re like an overdraft without the bank account, or a loan that can be renewed automatically.
Working within an overall credit limit set by the lender, you can withdraw money as and when you need it. Once you’ve paid some back, you can often ‘top up’ and withdraw more, making it a good solution for short-term cash flow gaps.
Merchant cash advances
Merchant cash advances are designed for businesses which take payment from customers using card machines, and they’re another useful method for increasing working capital if you’re not eligible for a standard unsecured loan.
The lending is based on future card revenue and is also repaid as a percentage of each card transaction. This means the amount you repay goes up and down with your takings, which is a good option for firms with unpredictable revenue.
Unlike a traditional business loan, instead of having interest running the total cost is agreed up front — however, merchant cash advances tend to be fairly expensive compared to more traditional loans.
Cash flow is vital for any business and managing it effectively could be key to the future success of your company.
Good cash flow management involves identifying potential pressures and making sure measures are in place to overcome them – which could mean seeking some outside funding.
There are many funding options available that can help both with day-to-day cash flow management and unexpected issues, and this is something well worth exploring.
- Whatever type of funding you are looking for, from long-term commercial mortgages to short term cash advances Funding Options is a free marketplace that helps match you with the best source funding for your situation.
- If you are thinking of raising equity funding to grow your business the Enterprise Investment Scheme (EIS) offers attractive tax incentives to investors so is worth exploring.
- For businesses seeking funding to buy new equipment, asset finance can be a good option.
More help on funding a business
ByteStart is packed with help and tips on all aspects of funding your business. Check out some of our most popular guides;
Funding your business
- Preparing to raise finance for your business – 6 Steps to success
- 5 Ways to unlock finance for your startup
- A Guide to ‘Alternative Finance’ – the new funding options for startups and small businesses
- What is Invoice Finance and how can it help my business?
- A Guide to business credit cards and using them as a short term funding solution
- 10 Late payment excuses used by customers and how to deal with them