Cash flow is a critical aspect to doing business, and something businesses of all sizes can struggle with.
Common barriers to cash flow are:
- Low profit margin
- High overheads
- Poor financial planning
- Unexpected expenses
- Customers paying invoices late
If you often have issues with cash flow, consider using invoice financing to get positive cash flow and relieve pressure until you receive payment.
Why is healthy cash flow crucial for a business?
Having healthy cash flow means a business is bringing in enough money to be able to pay its costs. It’s what enables businesses to pay staff, purchase inventory, cover rent and stay in operation.
Without the money on hand to pay for these necessities, a business simply won’t survive. Poor cash flow is by far the biggest reason why businesses fail – more than 80% of businesses that go under cite cash flow issues as a reason why.
In an ideal world, positive cash flow comes solely from business operations. There are ways to top up cash flow though – cash flow help can come in the form of a business loan, invoice financing or other borrowing.
Read more: What is a cash flow loan?
Seeing how important cash flow is, having a cash flow plan is critically important.
Barriers to healthy cash flow in a business (and how to overcome them)
When cash flow is an issue, it often comes back to one (or more) of these key factors:
Low profit margin
The profit your business makes generally feeds back into the business. Without surplus cash from business operations, this continual investment isn’t there. You may need to get cash flow help in the form of a loan, but this is only a short term solution. For a business to survive, it needs to be profitable.
Read more: Common issues with cash flow lending
Common reasons for a low profit margin:
- Sales or marketing functions aren’t capturing customers and generating revenue
- Low staff productivity
- Pricing margins are too low
- Spending too much
To get your profits up, consider if any of these reasons apply to you.
One of the quickest ways to get profits up is to generate more sales while maintaining expenses. Understand where your biggest opportunity is in this space – it may be to generate more leads through marketing, or it may be to better convert the leads you are getting by optimising your sales funnel.
High overhead expenses
Overheads are normal in any business, but they don’t actually relate to production and selling products.
For example, the rent you pay on your office space is an important cost to keep the business running, but it doesn’t contribute to your ability to make money in a material way (especially with the rise in remote working).
Review your overheads and see if there’s an obvious overspend anywhere. Cut ones that can be removed, or look to find other options for those that are too high.
No one likes surprise bills, and large unforeseen costs can put real pressure on a company’s cash flow. Equipment malfunction is a common example, where the business needs to find the money for repairs or a replacement.
When this happens, cut back non-essential spending to create room in your budget. Eliminate all the costs you can, even if it appears insignificant. They all add up! Be careful not to cut expenses that drive revenue. It can be tempting when the pressure is on, but more pressure will be created if your revenue starts to drop.
Poor financial planning
Without business forecasts and an accurate budget, it’s very easy for spending to get out of control and create cash flow issues. Poor financial planning comes through in two ways:
- First, not doing it at all, or having an unrealistic plan. Set up balance sheets and financial statements to give yourself insight into the mechanics of the business. Hiring an accountant or bookkeeper is the quickest, easiest way of doing this.
- Second, following a negative cash flow model. New businesses take time to become profitable, but your planning should include strategies to improve cash flow as you grow. You can only be cash flow negative for so long before it’ll catch up with you.
Read more: How to measure cash flow
Late payments from your customer
Businesses that make revenue through invoices are at the mercy of their customers paying invoices on time. If they don’t, you’ll have to dig into your own pocket to pay overheads and purchase stock.
Accounts receivable are great, but until you actually receive the money, you need to be able to pay for everyday operating costs yourself. The longer it takes for customers to pay invoices, the worse your cash flow is.
Businesses can enable and encourage customers to pay invoices quicker by nurturing a mutually beneficial relationship. Offer realistic payment terms, provide multiple payment options and communicate clear expectations with them at the outset of your dealings together.
Fixing cash flow problems in a small business
There are a few simple ways to improve cash flow in your business:
Create a cash flow budget
This is an estimate of how much money you expect to come in and out of the business in a set time period. This will help you to see how much cash you need so you can ensure you have cash when you need it.
Make it easier to get paid
One of the reasons why customers don’t pay invoices on time is if they can’t pay using their preferred method. If paying an invoice is difficult, customers likely won’t say anything, they’ll just put off paying it.
By offering multiple payment options, including using third parties and online payments, you’re much more likely to see a cash flow increase.
Cut unnecessary expenses
This is reasonably obvious, but it’s also one of the most effective positive cash flow tips there is.
It’s often easier to cut your spending than it is to earn more money, so if you find yourself under constant cash flow pressure, review your outgoings and see what expenses you can do without.
Have access to cash
There will always be times when money is tight, even if things are going well. It helps to have a safety net in these times – having a good bank balance is great, but it’s not always that simple.
Having access to a line of credit, or a form of cash flow loan that you can call on is helpful. Invoice discounting is a particularly effective technique for getting cash in those times where you really need it.
Use invoice discounting for a healthy cash flow
Having invoice discounting available to use when it’s needed is a fantastic safety net. It works by using a third party lender to advance the value of an invoice, which is repaid when the customer pays their account.
It costs a small fee, but it relieves the cash flow pressure that comes when there are bills due, or when customers are late to pay invoices. The average FundTap customer grew revenue by 54% over two years by having access to the cash they needed, when they needed it.
Many invoice discounting companies require businesses to use them for all invoices, but FundTap comes with the flexibility to use it only when it’s needed. This keeps the cost of invoice financing down.
It has a few advantages over getting a cash flow loan in that it’s easier to secure credit, doesn’t incur the same level of interest and other fees, is paid off quicker and is much faster to get money in your account.
Business owners are notoriously time poor, and when you have negative cash flow, you need to be able to settle it quickly and easily. FundTap has been specifically designed with this in mind.
Take home message
In an ideal world, regular business operations will feed through into a healthy natural cash flow. This isn’t always possible, and it makes having back up options important.
As far as cash flow interventions go, invoice financing with FundTap is flexible, easy and fast. Businesses can be approved for funding and set up within a few hours, then apply for invoice financing and have the money in your account on the same day.
FundTap integrates with your own accounting/invoicing software, so applying for finance is as simple as submitting an invoice to be paid. There’s no obligation to use it if it’s not needed, so it doesn’t incur extra fees and it’s an available option whenever it’s needed.
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