Regardless of the business or industry, growing sales while limiting expenses may not the be-all and end-all many think it is. While striving to improve profits is an important goal, cash flow is often a better measure of business success. Profit is an essential accounting measure however, it is cash that pays the bills. The timing of cash can impede growth opportunities and make paying necessary expenses and other financing commitments impossible.
Awareness of your business’s cash flow and working capital position is essential to managing your risk profile and future strategy. Many business owners and executives are now incorporating cash flow projections into their budgeting process. These estimates help them foresee variations in their business’s solvency position before it occurs, allowing them to make changes and make effective decisions. Do you know how your cash flow will look over the next few months?
The Importance of Working Capital
As a small business owner, there’s no doubt you’ve heard the term working capital. It is a critical component of any business and refers to the sum of funds (or equivalent) currently in use by a trading entity to support its operations. The specific components will vary for each business and industry; however, typical examples include money owed to suppliers, the ATO, stock on hand, or work in progress.
“A lack of working capital could spell a disaster for your business”
Working capital, and having sufficient cash flow to support it, is required to invest in growth opportunities, pay your bills and secure new suppliers and product. If your working capital is lacking, you may not be able to make these payments, fulfil customer orders or cover your mandatory debts – all of which could spell a disaster for your business.
How a Cash Flow Projection Helps Your business
Estimating your business’s future cash flow is not an easy task, which makes it that much more critical. If you are entirely unsure of how your future will look in regards to cash flow, you will benefit from developing a projection, even if it is a rough estimate. This estimate is particularly important if you are sitting on multiple unpaid invoices or other transactions that may be relatively uncertain.
- Does your budget tell you when cash will be coming in and going out?
- What will your cash position be next month if these unpaid invoices are not collected?
A cash flow projection helps answer these questions by estimating your business’s cash position at a future point of time. For example, say you are looking to purchase a new delivery vehicle, but you are unsure whether you should do it next month or in three. A cash flow projection may aid you to establish when your working capital will be in the best position to support the purchase. Knowing your future cash flow makes it easier to plan for future expenses, whatever they may be.
What to Do if You Expect Cash Flow Issues Lie Ahead
After projecting your cash flow, you may find warning signs that trouble lies ahead. You must address solvency issues immediately, preventing them from eventuating in the long run. Here are three key ways to improve your cash flow:
- Follow up any late or unpaid invoices and reduce the time your debtors have to pay, within reason. For example – if you give your customer’s forty-five days, cut it to thirty.
- Negotiate longer payment times with your suppliers, even if temporary. Proactively defer non-essential purchases until your cash flow situation is under control.
- If these are not sufficient, it might be time to seek external funding, such as a business loan, line of credit, equipment finance or an invoice finance facility.
How Invoice Finance can Help Your Business
Invoice finance allows your business to access cash sooner from unpaid invoices. Invoice finance providers such as OptiPay (OptiPay) will pay you up to 90% of your verified outstanding invoice value upfront. When your customer pays and OptiPay receives the funds, they will remit the remaining 10%, minus a small fee to compensate for the early funding. Your business can use this cash instantly to pay your bills, hire new staff, secure new suppliers or invest in growth opportunities.
While invoice finance can be a great solution to access cash upfront, the event of non-payment is also covered by OptiPay’s invoice financing solutions. OptiPay includes a form of trade credit insurance as an additional layer of protection. If your customer/s default on their payments, OptiPaySecure™ protects you by covering up to 90% of the invoice value issued to your debtor and funded. It also covers the legal costs to chase your client (the debtor).
Don’t let a lack of cash flow put your business at risk, improve your growth prospects and stay competitive by unlocking tomorrow’s cash flow today with OptiPay.
