Cash Flow - using finance to improve your businesses cash flow
So, if in business cash is king, then what can you do to make sure you never run out? One obvious way is to make a profit, but profit does not always mean you have access to cash. Effective use of finance can help you to manage your cash and ensure the health of your business.
When I worked in banking I would regularly come across clients who had issues with cash flow in their business. The thing that always stood out was that often if they had planned ahead, the solutions would have been easier to implement, and cost them less. Here are a few ways to effectively use finances to ensure your business doesn’t run dry.
Use Asset Finance and Business Loans to finance your equipment and major capital needs.
A common issue I have encountered over the years were clients who used their cash reserves, or overdraft, to purchase assets such as a vehicle or a piece of equipment. Often it is easier and quicker than arranging finance but at what cost. A lack of cash could affect your ability to purchase cheap stock or cover expenses when a job takes longer than expected or a debtor doesn’t pay on time, among other things. It can also cost more given most overdrafts have higher interest rates and fees than a loan. A simple way to maximise the amount of cash available and manage your cash flow is to finance asset purchases. And always try to ensure the loan terms are matched to the life of the asset so that you are not paying for it when it’s time to upgrade or replace.
Be flexible and consider; appropriate use of fixed rates; an overdraft, a line of credit or a business credit card ensuring that the level is appropriate for your business. Maintaining flexibility in your business so that you can change and adapt easily as market conditions demand is important, and this applies to your finance too. Fixing that interest rate on your business loan might seem like a good idea now, but it might restrict your ability to take advantage of excess cash in your business to pay down debt quick and save on interest. Having and using an overdraft, if you need one, is a good way to provide flexibility in your business. As a rule, your overdraft limit should match your cash cycle fluctuations i.e. you should be able to clear the debit balance in full when you collect your debtors. A good way to check if you have the appropriate level is to review the monthly highs and lows of your working account. Of course, there are many things that can happen that will affect your cash flow for example equipment breakdown, slow paying debtors, one off expenses, seasonal fluctuations etc. which is more reason to make sure you have an appropriate overdraft or access to cash.
Plan ahead, use a cash flow forecast to make sure your finances meet your business needs.
This is without doubt the most important aspect of managing your business cash flow and the health of your business. If you don’t have a cash flow forecast then you are effectively flying blind when it comes to managing the cash in your business. And if you are not regularly reviewing and updating it then as a business tool it will be almost useless. As a minimum, you should have a month by month cash flow forecast covering at least a 12 month period. Use past income and expenses as a guide and prepare it based on current and known future changes. Then review it at least monthly against actual income and expenses and adjust as appropriate. You should also update when there are any major changes in strategy, business conditions, profitability etc. Doing this will significantly improve your ability to make the right decisions for your business including when and if you need finance. The appropriate use of short term (overdraft’s, credit cards, lines of credit) and long term finance (asset finance, business loans) can improve the health and profitability of your business.
Treat your Business Banker and/or Broker as a business partner.
Finally, it is advisable to regularly review your banking setup up, particularly if you operate on overdraft, as your business will continue to change and evolve then so should your finances. To make it easier a good relationship with your banker and/or your finance broker will assist greatly. Make sure they understand your business and your strategic direction and treat them as a business partner. Fixing a problem before it becomes a major issue is a much easier and smarter way to manage your businesses health.