Within business, if you don’t have a healthy flow of cash throughout the business you will have problems. Cash is the lifeline of any business and without it, the likelihood is you won’t survive that long. Without cash you will struggle with the everyday running of the business, let alone covering all your outgoings. Planning things out at the beginning is critical to making sure you survive, if you have done your research effectively, you might know at some point you will come face to face with difficulties. The key to surviving, is being ready and prepared for when the business encounters these problems.
Common causes of cashflow shortages
For a lot of businesses cash flow problems stem from a lack of planning. Creating a cash flow forecast before you start trading, is essential for estimating how much money is likely to come into the business. You have to include all possible incomings, outgoings, monthly and yearly payments as well as possible seasonal variations.
Companies often tend to get ahead of themselves and start spending their cash on investments, or expansion before covering their overheads. Keeping cash in reserve is key, especially when paying quarterly or yearly bills, as these can creep up on you.
For B2B businesses, unfortunately you are relying on other people, your clients, to pay on time and bring money into the business. Clients are notorious for not paying on time and being unreliable with invoices.
Try to control your incomings and outgoings
Controlling when money comes into your business and when it goes out, might sound like an easy prospect, but in reality, it’s much harder. So, what can you do?
- Carry out credit checks on clients
- Make deposits on invoices the business norm
- Follow up on invoices as soon as you can
- If possible take full advantage of payment terms on your own outgoings
- If you are struggling, talk to suppliers yourself and try to come to an arrangement
Carrying out credit checks can save you a huge amount of trouble and hassle. They give you a chance to look at how clients have been previously when it comes to paying, have they paid reliably and on time? If not, you could implement shorter repayment terms to make sure you’re more likely to get receive the invoice. Alternatively, deposits can help influx a constant flow of cash and keep some money coming in to help with your own regular payments. Some money is better than none. There is nothing wrong with following up on your invoices and it’s a good practice to follow, this doesn’t necessarily mean demanding payments, but there is no harm in asking for what you’re owed.
When it comes to outgoings for the business, if you can, take full advantage of longer repayment terms yourself. Pay them when you can and when it is most suitable for the business. Don’t leave yourself short on cash by paying for everything immediately when you still need the cash. For suppliers, it’s important to keep in touch with them, if you are struggling with cash tell them your problems and try to work on an arrangement. Your suppliers will want you to succeed as you’re a customer to them and might be more willing to give you extended payment terms.
How can I get out of cash flow trouble?
Sometimes in business, cash flow problems are inevitable and you might just get unlucky. You could be hit with problems through no fault of your own and see an unexpected large cost unsettle business cash flow. If the business is genuinely viable and works, thankfully there are things you can do to get out of trouble.
Invoice financing is a great option for B2B businesses, especially if late paying clients is your main problem. Invoice financing means the business can obtain an advance based on the value of your impending invoices, freeing up cash for the business. A factoring company will go through all your invoices and decide on the potential risk involved before anything happens. The business will then receive an advance up to a certain value of those invoices, before collecting payments from your clients, taking back the fees they’re owed and then returning the remaining cash. As well as freeing up more cash within the business it gives owners more time to work on the business, which is crucial for start-ups.
If invoice financing isn’t an option for you, a business overdraft is a straightforward means of securing a reserve. Agreed with the bank beforehand, it enables the business to have funds when the account is overdrawn. If this is a short-term agreement and a reasonably small overdraft amount, the bank may lend unsecured, however, with a higher amount and as a long-term overdraft, they may need security.
Another option is to apply for a bank loan. Banks have tightened up their restrictions when it comes to lending, but if you can prove that the business is working efficiently you will stand a better chance of receiving a loan. The important things banks like to know are, why you need the loan, what it will be used for and how you will pay it back. The bank will assess in detail how likely things are to go wrong for the business and with that possible risk, they may ask for security as guarantee on the loan.