Cash flow is a word that can strike fear into business owners, because it’s often followed by the word ‘problems’. However, it doesn’t have to be that way: if managed correctly, a business’ cash flow situation becomes an asset that can be used to fund investment and growth.
The way you think about cash flow shouldn’t be “how can I pay all these bills?”
What you should be asking yourself is “how can I make all this income work for me?”
Why Does Cash Flow Become a Problem?
Typically, cash flow issues arise as a business grows, because in order to produce more product to sell it first needs to hire staff and buy supplies. Many businesses use their overdraft at this point, or arrange a bank loan to plug the gap until they get paid. However, because these need to be repaid with interest, they tend to become a further bill on the list, with serious consequences if the business can’t pay on time.
That’s why the growth stage – when small businesses with a good product seek to scale up and fulfil their potential – is such a dangerous time. A study by Inc. Magazine which looked at firms on its list of the 5,000 fastest-growing companies found that about two-thirds of those promising businesses had shrunk in size, gone out of business, or been disadvantageously sold after a few years.
Of the reasons for growth-stage failure listed by Inc, several could be classed as cash flow problems: mounting overheads; Failure to address growth possibilities in loan planning resulting in large loans that are difficult to stay on top of; Accounts receivable issues such as being unable to collect money owed fast enough; And an inability to handle the increasing complexity or load of financial accounts.
How to Turn Cash Flow in Your Favour
Perhaps surprisingly, Inc. recommended targeting steady growth rather than stellar levels as a way of ensuring a business is sustainable. However, while this may be good advice for inexperienced entrepreneurs, seasoned businesses which suddenly have the chance to take on profitable new contracts should not have to turn customers down because of funding fears.
Quite the opposite: if you have orders in place with reliable business customers (B2B), you can take control of your cash flow situation and actively use it to fund your company’s expansion. There are various methods of business finance based on cash flow to help you do this, depending on you circumstances.
Get Your Money on Time
It is unfortunately still common in many sectors for business to business invoices to be paid 30, 60 or even 90 days after receipt. Sometimes a business knows exactly when its invoice will be paid, other times it is unclear. This is very damaging and is the primary reason otherwise profitable enterprises get into trouble.
The solution is simple: use Invoice Discounting or Invoice Finance. This is the business finance cash flow funding solution that OptiPay specialises in, and it lets you get your invoices paid as soon as you issue them. This means you can use that money to fund your growth instead of having to arrange long term funding or overdrafts.
Manage Your Supplier Payments
You don’t want to be part of the problem by being a late payer, but on the other hand if you pay suppliers too soon you are again left with a funding gap. Another smart solution exists to solve this problem: Supply Chain Finance.
Supply chain finance is also based on the fact that you have solid orders to fulfil, and it works by paying your suppliers upfront and getting a favourable discount or early payment discount. This usually fully funds the financing and you can pay on the usual terms, perhaps 60 days later and in many cases you are able to even make a profit or margin as the funding costs are less than the discount are you able to negotiate.
By managing a business’ increasing income and expenditures, a growing business can turn its cash flow into a strength. Indeed, cash flow can be a central part of its business funding strategy, and one that is safer and cheaper than traditional alternatives.
Get tomorrow’s cash flow today.