Cash flow describes your company’s cash position and how it changes from one period to the next. That doesn’t sound so complicated, compared to annual budgets, profit-and-loss adjustments and five-year business plans. However, none of those will sink your business as quickly as poor cash flow.
Maintaining a healthy cash flow really is the key to the success or failure of your business.
Good Cash Flow
With a positive cash flow, you’ll have the resources you need to grow your business. Over time you’ll need to invest in your business in any number of ways – buying machinery, expanding office space, acquiring new technology or hiring and training new employees. With a positive cash flow, you’ll have the capacity to do this, responding to business decisions as appropriate without being financially restricted.
Beyond facilitating long term business growth, a healthy cash flow is critical to the day-to-day running of your enterprise. Having the money available to meet your business needs and settle liabilities in a timely fashion is what keeps your business running. Without a positive cash flow, you won’t be able to pay monthly salaries, tax liabilities or payments on existing business loans. In addition, if you don’t have the money on hand to settle supplier accounts within credit terms, you may not receive future supplies when you need them.
Poor Cash Flow
Even with healthy profits on paper, negative cash flow can force your business to cease trading. In order to guard against this, you need to plan carefully in advance by preparing regular cash flow forecasts. In addition, you should monitor the financial position of your company on a regular basis. While you’ll probably need assistance from an accountant, it’s important to have a firm understanding of your business cash flow rather than leaving it to others to calculate.
Even with careful planning, sometimes factors beyond your control will negatively affect your cash flow. For example, when economic and trading conditions are difficult, the end customer may seek to delay payment, forcing others further up the supply chain to delay their own payments. Strapped for cash themselves, your retailers start seeking extended payment terms from you, settling not in 30 but 60 days instead.
You may have little choice but to wait for your money but you still have your own salaries, rent and suppliers to pay. If you’ve got healthy reserves of cash to cover such an emergency, you’ll be able to ride the storm. If not, you’ll have to seek extra finance through some form of credit facility. However, if you’ve already used up your reserves and exhausted existing lines of credit, how can you keep your business operating?
Improving Cash Flow
Provided your business is still viable and making money, a short-term cash flow crisis needn’t spell disaster. In such a situation, you’ll probably need a short-term business loan in order to provide a fast cash injection and prevent your business debt becoming grounds for insolvency. To work out how much you would need to borrow, draw up a cash flow forecast for the next six months. This will enable you to calculate your working capital requirement, the money you’ll need to keep afloat.
While short-term loans can rescue a business in dire need of cash, you should ensure that the money required to make monthly repayments is not so onerous as to hamper your ability to trade normally. If it is, find another source of finance if possible. At the same time, do what you can to improve your existing cash flow. This includes invoicing as soon as work is completed or goods supplied as well as offering discounts for early payment. Staying on top of invoices owing and including late payment fines on your terms of agreement will also incentivise your debtors to pay up.
Maintaining a positive cash flow should ensure the long term success of your company. If your business includes high up-front costs, or if you regularly wait long periods to receive payment from customers, make sure you plan ahead to avoid cash drying up when you need it most.