Why do cash flow problems happen?

Your business outgoings are likely to be regular payments, such as monthly bills, debt repayments, staff wages etc. However there will sometimes be larger one-off payments that occur, such as for buying new equipment.

In contrast, your inflow will be much less predictable. You can estimate but won’t know for sure how many sales you will make on any given day, and if you invoice customers for payment, a proportion of those are likely to be paid late.

This creates an imbalance in your cash flow and if your money coming in doesn’t cover the payments that need to go out on a certain date, your business could run into trouble.

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How do I manage cash flow?

Managing cash flow is all about trying to anticipate and plan for both inflow and outflow of money, in order to ensure your business has enough to cover its expenses at all times.

Start the management process by examining each outgoing, asking questions such as: what date in the month does it need to be paid? Can payment be moved or delayed when necessary? How many larger items will need to be paid for on an ad hoc basis?

And on a wider scale, ask:

~ How much money does my business have at any one time?
~ How much money do I need at any one time in order to operate effectively?
~ Which times of the month do I need money and how much?
~ Can I plan to expand my business based on my cash flow?

By planning your outgoings to roughly match the times when you have an inflow of cash, you can keep track and manage your cash flow much more effectively.

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Are there any financial solutions to help me manage my cash flow?

Many businesses use an overdraft to plug a gap in their cash flow. This can be a good solution in the short term, for one-off payments, however you should avoid using an overdraft for purchases of capital equipment, or loan repayment. Because all overdraft facilities are repayable on demand, they should only be used for working capital. The problem for many businesses is that banks may not be able to provide sufficient overdraft to meet the working capital needs of a growing business.

Matching funding to business cycle is crucial to a business’s success. The best working capital solutions are those that link the level of funding, to your business activity. Invoice finance facilities work on this basis.

With Factoring (a type of invoice finance), for example, the Factor will advance you money only when you raise an invoice. They will pay you a percentage of the invoice value upfront, and then if you want them to manage your sales ledger on your behalf, they will chase up payment from your customer. When your customer pays the invoice, the Factor recovers the advance from the amount paid by your customer, less their fee and interest for the period, and refunds the balance to your business.

In this way, you can not only manage your cash inflow more tightly but also your debts, as repayments are related to payments from your customers.

Taking out an invoice finance facility allows you to plan ahead and match your cash inflow to your outflow, therefore avoiding gaps and problems down the line.

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This article was first published on Simply Business