Attention: You are now leaving the Wintrust website.
by Ankit Agarwal
March 27, 2018
by Ankit Agarwal
March 27, 2018
Keeping a steady flow of cash throughout a small business can certainly be a challenge, but doing so is key to survival. Cash is key, it is the lifeline of any business and without it, no business will be able to survive. So what can a business to do to help manage cash flow? To begin with, planning is essential. Create a cash flow forecast so that you can sensibly estimate how much money will be going in and out of the business when you might encounter cash flow problems and what you can implement to prepare for these problems. Almost all small businesses will at some point, suffer with cash flow problems, the key is knowing when it will happen and what you might be able to do to prevent those issues.
For lots of small businesses, cash flow problems come from just timing. If outgoing payments are moving out of the business sooner than you're getting money into the business, eventually it will catch up with you. This might not be down to the model, or lack of business, but if cash isn't coming into the business quick enough then naturally problems will incur.
Not enough small businesses do enough planning which ultimately leads to cashflow problems. On a cash flow forecast, all incomings and outgoings need to be taken into account, on a monthly, quarterly and yearly basis. The most important thing to consider, is if the business can break even, does it work?
Sometimes it doesn't matter how much planning a business does, it may just be hit with bad luck. A large piece of equipment could break or there could be a massive spike in inflation. Unless the business has enough to cover these sort of costs, it will more than likely encounter problems, unless there is cash in reserve most businesses will be constantly playing catch up.
A business also has to consider if it relies on certain seasons. If certain months are more profitable than others, enough cash must be kept so the business can survive through the quieter months of the year.
For a lot of businesses, the idea of controlling money coming in and out may seem like an easy job but things aren't always that clear-cut. But there are a few things that businesses can do to try and help cash come in and out more efficiently.
Ensuring that clients pay on time is what every business wants, but ensuring that they do is almost impossible. Sometimes clients are simply unreliable. But what's important is making sure that you stay on top of them and ensure that the business can get its money within a reasonable time frame. If a client is late, follow it up immediately, there is nothing wrong with pushing for what the business is owed and it can be bad news if a business is relying on payments from a select group of clients, who pay on time.
If you are able to bring some money into the business, then it will only make the handling of cash easier. This is why a deposit on any work can be massively beneficial as it enables the business to get some money in and aid cash flow. It might also be more appealing to clients, as they won't have to pay the full cost of their contract all in one.
When it comes to outgoing payments, it's important to make sure you pay them at the right time. There is no need to pay anything off immediately if the business doesn't need to. If the business is running short on cash, pay at the end of the month or on the last day it's due. Things can work similarly with suppliers, if the business is having trouble paying suppliers, there is no harm in asking for an extension. As a client to suppliers, they will want the business to succeed and do well.
Although being in cash flow difficulty is a precarious position for any business, there are things which can be done to help the business get out of trouble.
B2B businesses can turn to invoice financing, which can be a brilliant option when it comes to steadying the ship and bringing in a quick injection of cash. If late paying clients are at the root of the problem, then invoice financing effectively gives the business an opportunity to obtain an advance based on the value of its invoices.
A factoring company will first look at the invoices due, assessing their quality and risk. If deemed ok, the factoring company would advance the business a percentage value of the invoices, then collect what's owed by the client, take back the fees they're owed and then return any change to the business. As well as giving an advance to the business and potentially getting them out of cash flow troubles, it can also free up owners to do more with the business as appose to constantly chasing up invoices.
If the problem isn't necessarily late-paying clients, but a large bill unexpectedly hit the business, then a bank loan or overdraft might be a better solution.
When it comes to a bank loan, they may be hesitant to lending to a business which is struggling with cash flow. However, if the business can prove that the model works and it's genuinely viable then the banks may be willing to help. However, if things are deemed too risky they will be less likely. This is what can make the process of getting a bank loan very stressful.
An alternative which might be more appropriate is a business overdraft. This would allow the business to have funds once the business account becomes overdrawn. The amount in which the business is overdrawn will be agreed with the bank beforehand and will be designed to meet the needs of the business. If it's just a temporary problem for the business then it's likely a modest amount of cash will be available in the overdraft facility. If a large amount is needed over the course of a few years, then most banks will likely require security.