Cash flow is perhaps the most under-appreciated business metric. Things like profit and revenue are headline measures that often attract attention, but even businesses that are making money and growing quickly can come unstuck by a poor cash flow.
82% of business failures are due to constrained cash flow. With that in mind, it’s critical business owners do what they can to ensure they have the cash they need to do the business they need to do.
Short term cash flow is critical for small businesses to stay afloat and grow. Invoice financing is one of many techniques business owners can use to support their growth and carry more cash.
Short term cash flow is an analysis of the flow of cash into and out of your business, and how much cash you actually have on hand at anyone time. By listing all sources of income and expenses that are due to be paid, you can determine if you have the cash at all times to meet your business needs and your bills.
The reason it’s important is it shows the ability of a business to pay its debts in that time frame. If your business is working on a long term project and not invoicing for the work until the end, you’ll likely have bills to pay in the meantime. Without cash reserves or another form of income, you may not be able to pay these bills when they’re due.
Businesses can use forecasted cash flow to analyse their cash flow position in advance. It may be that cash flow finance, such as an overdraft or invoice financing is needed to get through to when invoice payments will come into your bank account. This also avoids the need for predatory pay day loans or very short term loans with high interest rates.
What is invoice financing? More on that shortly…
If you find yourself continually short of cash flow, you may need to look into capitalising your business with a longer term loan to provide stability in your business. You can then use invoice finance and/or and overdraft to meet the day to day peaks and troughs of cash flow. A combination of term lending and cash flow finance is often the optimal finance structure for small businesses.
Cash flow is hugely important in keeping a business afloat. It’s necessary to afford to pay for daily operating costs, purchasing inventory and paying staff. All of these things are fundamental expenses that allow a business to run.
Imagine a business that doesn’t have enough money to pay wages. Staff have their own living costs to pay for, and they need to be paid on time. The same goes for landlords, banks and utility companies – things like rent, loan repayments and bills all need to be paid when they’re due.
Missing any of these payments is likely to come with serious consequences to your reputation and your ability to do business. Staff may quit, your electricity may be turned off, or your landlord may lock you out of the building.
Many small businesses don’t operate with large bank balances, which means they need to have regular income to cover these expenses. Ideally, this comes from cash coming into the business through sales. An overdraft or invoice finance can help, but it is still best practice to keep a close eye on your cash flow and put in place measures to improve this where you practically can.
It’s vital that businesses have a cash flow projection that allows them to identify and prevent issues in advance. Having a dedicated approach to forecasted cash flow means being able to regulate your income and spending so you always have enough money on hand to pay upcoming expenses.
How can you enable better business cash flow? Read on for some of the top tips…
Improving your cash flow isn’t about making one-off moves to get quick cash. It’s about regulating your systems and processes to enable positive cash flow from one month to the next.
These are some of the most effective tips to improve short term cash flow for your business.
This may seem obvious, but for many businesses, sales are the main form of income. The more sales you make, the better your business cash flow. In the short term, you can have a sale or have a marketing push that encourages customers to purchase more than they normally would.
Up-selling is one way to do this – buy two, get a third free, or offer discounts for purchases above a certain amount. Targeting existing customers may be more effective than trying to lure in new ones.
Overdue invoices are one of the leading causes of cash flow issues. When a customer is slow to pay an invoice, you may not have the money on hand to cover bills, wages and other expenses. You know that money is coming, but you just don’t have it on hand.
Invoice financing involves using a service such as FundTap to purchase an invoice or group of invoices so you get them paid immediately. When your customer pays the invoice, you repay FundTap, plus a small fee.
There are many reasons why an invoice isn’t paid on time – the customer may have forgotten, they may not have received the initial email or they may not have scheduled payment properly – but sending a polite reminder is the best way to ensure it’s paid quickly.
The way you go about sending invoices has a very real impact on when they’re paid. It may sound silly, but it’s easier than you may think to forget to invoice at all. Using invoicing software is a good way to standardise your invoicing systems to today’s standards.
Different clients will have different payment preferences. The more you’re able to meet those preferences, the easier you make it for them, and the more likely you are to be paid on time.
Having customer subscriptions is a great way to regulate your income each month. You can even offer subscriptions for 6 or 12 months, giving you an immediate cash flow investment.
Referral discounts to existing customers are a great way to bring in new customers – the value of a new customer more than makes up for the discount you give someone else.
If you have short term debts, you may be able to restructure them in a way that improves short term cash flow. For example, you may be able to negotiate a long-term debt with a lower interest rate that frees up cash for you, and benefits the lender at the same time.
Buying office equipment or vehicles can result in large, one-off expenses that can be hard to cover. However, leasing them is much easier on your wallet, spreading the cost over a longer period of time.
It’s no good having stock clog up storage space for years on end. Selling old stock for reduced prices is a great way to free up space for things that are easier to sell. You may even sell it for a loss if you really want cash in hand.
Scheduling payments for the day they’re due is good for your cash flow – it means you have more money on hand for longer. If you pay too many bills too early, you may not have enough money to afford other payments later in the month.
Read more: These are just some of the many ways to improve business short term cash flow. See more here.
Most businesses experience negative cash flow from time to time, and it’s not terminal. The important thing is to minimise these instances as much as possible, and have enough resources to be able to cope when it does happen.
Modelling cash flows is a fundamental technique that helps you to identify cash flow issues in advance. The sooner you recognize a potential issue, the more you’ll be able to do something about it.
Being able to redeem invoices quickly always helps. With FundTap, it’s easier and cheaper than ever to get your invoices paid.
FundTap works by purchasing your invoices immediately, and allowing you to debit back the value of the invoice when it’s paid. You can integrate FundTap to your invoicing systems online, select which invoices you want paid and have the money in your account within hours.
This makes FundTap one of the most effective sources of short term business cash flow assistance. You can use it as you need, selecting only the invoices you want paid immediately, which gives you flexibility and freedom.