It’s one of the biggest clichés of running a business – cash is king. But the old maxim rings true, since money in the bank is essential for any company, large or small. Whether it’s to pay staff wages, buy stock, or cover the rent and bills, cashflow is the lifeblood of an SME, and without it, things soon get tricky.
Cash from sales, new finance, regular expenditure, VAT and tax demands, monthly interest owed – all affect how much working capital a business has. And there are many things that can go wrong in that formula, whether it’s weaker sales than expected or the arrival of an unexpected bill. Firms often turn to us at Boost Capital for a short-term business loan to cover times when money isn’t coming into the business as quickly as hoped. So, what can enterprises do when they find themselves temporarily financially embarrassed? And how can they try to limit the probability of this occurring in future?
Why cashflow counts
A need for ready cash is one of the major reasons many businesses approach Boost Capital for help. Our US parent company Business Financial Services recently announced it has provided more than $1 billion in small business financing, and funding cashflow remains a common demand for many business owners we work with on both sides of the Atlantic.
It might be that a firm is left out of pocket by a debtor, is going through a slow trading period, or has an unforeseen expense that’s left the company bank account looking less healthy than it usually might – they’re all familiar scenarios, and ones with which we frequently help SMEs.
- One in three UK small firms says cashflow-related problems are limiting the growth of their business, a Government study has shown.
Types of bridging finance
As we’ve mentioned, short-term loans, such as those we offer at Boost Capital, are a popular option for small companies looking to cover a shortfall in capital over a few weeks or months. More small business owners are looking to alternative finance providers when it comes to finding help with cashflow, and there are a number of options available to them from alternative providers and beyond:
- Factoring and invoice discounting. Use of these arrangements can improve a business’s cashflow by providing funds against unpaid invoices. It’s a familiar path and one that many enterprises understand and favour.
- Leasing and hire purchase. These types of agreement can be favourable for firms that need to buy a new piece of large equipment unexpectedly, say, if a key piece of machinery breaks.
- Trade credit. While it’s not a formal product provided by a financial institution, agreeing longer payment terms with suppliers is a time-honoured method for smaller businesses to manage their cashflow. About a third of SMEs regularly uses trade credit from suppliers, the latest SME Finance Monitor
- Overdraft. Many small firms still opt to dip into their bank overdraft facility if funds are looking thin on the ground – about one in five takes this route, Government findings indicate.
Knowledge is power, and that’s certainly the case when it comes to knowing how much money is flowing into and out of your business. Sensible business owners will have accounting software to prepare budgets and cashflow forecasts weeks and months in advance. Pinpointing where money is owed, plus where you’re likely to have outgoings should help you spot potential problems on the horizon.
If you find you need to borrow in the short-term, lenders are likely to be favourably impressed that you have such a clear understanding of your company’s finances. And you should be able to identify when orders or sales start slipping, often a red light that greater financial issues lie ahead.
Simple cashflow-enhancing tricks
Once you’ve identified that there’s a likely cashflow problem pending, you’re in a position to try to avert the situation. There are several common methods for improving the health of the firm’s bank account:
- Change suppliers to decrease your costs. Almost two-thirds of SMEs have done this to boost their financial health. It’s all about being cost effective, both in how you operate, and how you spend.
- Improve payment terms with suppliers. Negotiating might get you extended payment terms in times of need.
- Talk to other entities to which you owe money – utility firms or your landlord, for example – to ask for leniency if you find yourself on hard times. If it’s the tax authorities, the Government has a Business Support Payment Service, which allows SMEs to arrange later payment on outstanding bills.
- Reduce orders for further stock if possible to minimise the money you’ll owe in several months’ time.
- Act to slow down sales growth, since it requires working capital to fund an increase in sales. Ask yourself if you’ve currently got the finance to cover the extra expense.
But there’s still one area that’s probably the most important when it comes to managing your cashflow effectively…
Limiting late payments
Overdue invoices are a perennial headache for small business owners, and late payments have a huge impact on firms’ cashflow. But, while some businesses cynically use their suppliers as a source of unlicensed credit, too many SMEs make themselves vulnerable by having sloppy payment processes that are damaging to their own cashflow, and put their company at risk.
The Government recently announced the creation of a Small Business Commissioner who will have a specific role in intervening in late payment disputes, which is a welcome development. But firms can do more themselves to invoice promptly, track accounts, and chase payments as soon as they’re overdue to ensure money owed is flowing into the company coffers. We’ve discussed late payment here before, and provided further tips on getting debts paid on time.
A belt and braces approach to business
Finally, there are a number of other measures business owners can take to prevent themselves getting into dire financial straits:
- Build up a financial reserve to protect the business when unforeseen contingencies arise. Machinery breaks, people leave unexpectedly and can need costly temporary replacements, floods happen – you need a backstop if something unexpected happens.
- Don’t work on a speculative basis without guarantee of payment, or put an unrealistic price on stock or work in progress. And if a customer doesn’t pay up when expected, don’t do any further work until bills are honoured.
- Always be clear on order terms with customers to avoid disputes over payment later. You might also think about taking deposits on orders to ensure cash is coming into the business at all times.
- Undertake proper credit checks of new customers to see if they’re likely to pay their bills.
Help is available when companies find themselves out of pocket, and lean periods happen to the best of businesses. But business owners should have a handle on where the money is – or isn’t – in their enterprise. Because once you know what you’re facing, you can decide how to act to get the cash flowing once more.
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