Cash flow is simply the net change in a company’s cash position from one period to the next. So, can something that sounds so mundane really mean the difference between the success or failure of your business?
Positive cash flow
Positive cash flow can be the catalyst for growth of your business. It can give you the capacity to invest in your business, be that in machinery, bricks and mortar, research, technology or training. It also affords you the flexibility to respond to critical business decisions without being restricted by financial considerations.
While having the ability to grow and develop their business is desired by all business owners, good cash flow plays a more important, essential function necessary to all businesses. Having the required amount of cash available to meet your business’s requirements at any given time means having the ability to settle liabilities as and when they fall due. It enables you to service the monthly wage bill, pay tax liabilities when due and settle supplier accounts within credit terms, ensuring future supply.
If positive cash flow performs such an essential function, it follows that poor cash flow must hamper trading. Good forward planning, the preparation of cash flow forecasts and regular, frequent monitoring of the financial position of the company will assist in the prevention of cash flow problems. In some instances, however, there may be factors out of your control that affect your cash position.
Cash flow beyond your control
For example, you are a manufacturer of product which you supply to a distributor who in turn supplies the product to a retailer in a number of outlets. In difficult trading conditions, the end customer has become savvier, and more reluctant to make an immediate purchase, if they even make a purchase at all. As a result the retailer is late in paying the distributor. They, in turn, seek extended payment terms from you in order to assist their own cash flow. Suddenly, your usually strict 30 days terms of credit are being extended to 45 days or even 60 days. You will be paid, eventually, but later than you were expecting.
In the meantime, you still have wages, suppliers and rent to pay. You may be fortunate and have significant cash reserves or a credit facility, which can be called upon to fund the shortfall in cash income. But what happens if you end up in a scenario where you have depleted your cash reserves, exhausted existing lines of credit and you are out of money? What then?
How to improve cash flow for business
Running out of cash when you have a viable, profitable business should not mean the end of your business.
The first step in learning how to improve cash flow for your business is to understand your current cash flow position. A cash flow forecast, showing when money is coming into the business and when money is due out, for at least 6 months ahead will help you identify how much money you need as a buffer, this is your working capital requirement.
Used sensibly, short term business loans can help in this situation. A quick injection of cash to overcome an unexpected situation can help with cash flow problems and prevent business debt leading to insolvency.
By invoicing immediately when work is complete or goods supplied, you can avoid business debt from overdue or unpaid invoices, which is largely brought about by not keeping up with the paperwork and moving onto the next customer before invoicing the current one.
If you are suffering from cash flow problems despite your best efforts, or perhaps as a result of the nature of your business with high up-front costs and long delays before payment is received, then you may need to start negotiating delayed payments with your own suppliers to ensure the business doesn’t spiral out of control into an insolvent situation.
This article was originally published by Cashsolv
Author: Suzy Franklin is a business recovery specialist. She started work in the business recovery profession in 2005 and has continued to pursue an ethos of working with distressed businesses to help them overcome their financial problems. As a senior manager of Cashsolv, she offers advice and support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business.