Why is keeping a good level of cash flow is so important for business?

It doesn’t matter if you are a start-up, a big fish in the business world, or if you rule the market place, cash is key and maintaining a healthy level of cash flow is key. Cash is the lifeline of a business any business, even if your sales and profits are through the roof, if it doesn’t flow effectively through the business, naturally there will be trouble. It might not be a bad business plan, you could just be unlucky, one bad debt, or a few poor months’ worth of trading could put the business towards a negative spiral of being constantly behind.

So, what can you do? It’s mostly about preparing your business for the worst and making sure you have a plan set out as soon as you start trading. However, there are some things you can do to get yourself out of trouble.

What normally causes cash flow problems?

Commonly there are a few issues which typically send a business towards a downward spiral. Lack of preparation or planning, late paying clients and simply just getting unlucky.

If the business fails to prepare adequately for cash flow troubles it could have huge consequences on the business. All start-up costs and the potential long-term effects of paying back loans, need to be considered and developed in a cash flow forecast. Everything within a cash flow forecast must be included. It gives business such an advantage when it comes to managing cash, and planning ahead, especially for monthly or yearly tax payments, whilst also taking into consideration seasonal variations, if that’s something your business might depend on.

Sometimes cash flow troubles can hit a business through no fault of their own. If a large asset or piece of machinery breaks and it’s a vital part of how the business operates, sometimes the cost of replacing it can be so great, it puts the business into a negative cash flow run. The business could be running smoothly but if there is not enough saved, it can leave a serious dent in a business’s savings.

One of the most common causes of cash flow trouble is late paying clients. Even if things are going well and there are sales flying in, if the money isn’t coming in quick enough, then a business will struggle.

How can you be better with your incomings and outgoings?

A business always needs to be continuously planning ahead and always making sure there is enough in reserve to cover any problems. This helps to maintain a healthy flow of cash throughout the business, which in theory sounds like easy, but in reality, it’s not always that straightforward, so how can you shore up your incomings and outgoings?

• Follow up on late payments from clients, where necessary be assertive. There is nothing wrong with asking the money you’re owed.
• Make it part of your company policy to carry out credit checks on clients, assess their history of paying on time
• Where you can, make it your business norm to collect deposits up front from clients
• Make the most out of any of your own repayment terms, if it suits the business make payments on the last day available.
• If you deal regularly with suppliers, but you’re struggling with cash flow, discuss the options available with your supplier, talk things through with them and try to come an agreement for a later date.
• Try forms of commercial finance as a means of paying for equipment and having a bit more control over your cash flow.

Ideally a business would have clients who are always paying on time, it’s what everyone wants but making it happen is a different story. Clients are so often unreliable, so staying on top of them and trying to ensure you get your money within a suitable time frame, that suits the business is key. If a client hasn’t paid within the terms of the agreement, then make sure it gets followed up immediately. It might only be an email or a phone call, but if you push them you’re more likely to receive payment. There is nothing wrong with asking for what’s owed, this becomes even more critical if the business is reliant on just a few clients.

Receiving some money is better than none, this is why deposits can be so beneficial for businesses. The sooner money gets into the business, the easier it is to plan, sort out cash flow and make outgoing payments. Some clients may be hesitant, but be sure to point out the benefits for the clients themselves, it breaks up their payments, making it potentially easier for them.

When it comes to outgoings payments for yourself, it’s can be vitally important to be savvy when it comes to controlling your own outgoing payments. Make sure you take full advantage of your own repayment terms, you have the option to pay within 30 days and it will ease cash flow to wait till the 30^th day, then take advantage of that. When it comes to paying overheads, try to make them run parallel with when the business receives regular client payments.

My business is already in trouble, what options do I have?

For B2B businesses invoice financing can be a brilliant option to steady the ship and bring in some much-needed cash. If late paying clients are the main problem, invoice financing effectively allows the business to obtain an advance, based upon the value of your invoices from those clients.

A factoring company assess the quality of the businesses invoices as well as any potential risk involved. If everything is deemed ok, the factoring company, would advance you a percentage value of the invoice, before collecting it from the client, taking back what they are owed along with a fee and then giving the change to the business. Not only does this give you the necessary cash to help with any problems, it also frees up more time, so there aren’t people chasing up clients.

If the business has been hit by a large bill they perhaps weren’t expecting, then a business overdraft may be a better route to go down. This means that a business can have funds available, once their account becomes overdrawn. The amount available is agreed with the bank beforehand and will be created to meet the needs of the business. If the problem is only temporary, then a modest amount of cash will be available in the overdraft facility, if there is a larger amount needed for a longer period of time, security will likely be required.

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.