Cash flow management is one of the key skills required for running a successful business. Of course, revenue and profit are important, but cash flow allows you to pay suppliers, cover overheads, and invest in the growth of your business.
But maintaining healthy working capital isn’t easy. A recent study by Xero revealed that 56% of businesses face cash flow pressures.
So what are your cash flow options when you need to increase liquidity, and how do you ensure cash flow keeps up with business growth?
That’s what we’re going to explore in this guide.
What Is Cash Flow?
Cash flow is the movement of money in and out of your business. If your outgoings exceed your incomings, you’ll experience negative cash flow.
This doesn’t always mean there is a profitability problem. For example, you may have recently made a significant business purchase, or your outgoings may fall before customer payments are due.
But it does mean you need cash reserves or additional funding to cover the cash flow gap.
Most businesses fail due to insufficient liquidity. When a company’s incomings fail to cover its outgoings, it creates a domino effect, leading to insolvency.
How to Predict Your Future Cash Flow
It’s important to be proactive when it comes to your business finances. Many SMEs find themselves struggling to cover the costs of growth because they don’t anticipate the impact on cash flow.
Taking on more clients means higher upfront costs. For example, you need to pay for inventory and staff to process new sales orders. In most cases, these outgoings are due well before you receive payment from your customers.
But you can avoid these cash flow gaps if you can accurately predict your incomings and outgoings.
A cash flow forecast can help you gauge your cash balance at the end of a set period. It points to the cash you will have on hand after deducting expenses from net income.
By estimating your future cash incomings and outgoings, you can predict if you’ll have enough working capital to cover expenses and reinvest in your business.
If you need some help creating a cash flow forecast, read our guide and download your free template here.
8 Cash Flow Options and Strategies
Once you understand your company’s cash inflows and outflows, you can explore the different cash flow options available to you.
Here are eight ways to increase working capital and improve cash flow management.
Invoice Finance is one of the fastest ways to get a cash injection into your business. If you sell to other businesses on net terms, you can use your unpaid sales invoices as collateral for a funding facility.
You can access up to 95% of the invoice value upfront instead of waiting 30+ days for your customer to pay. When your customer settles the invoice, the finance provider will release the remaining invoice balance, less fees.
There are several different types of Invoice Finance that can be tailored to the needs of your business. You can choose from a confidential facility, whole ledger debt factoring, or short-term Selective Invoice Finance.
Read our guide, What Is Invoice Finance?, to learn more about this type of Business Finance.
A business overdraft allows you to access funds after your account balance reaches zero. You can continue to draw cash up to a pre-agreed limit.
This allows you to access crucial funds when they are necessary. You’ll be charged interest on the credit you use. Once you repay the amount borrowed, you’ll stop being charged.
A business overdraft can be a valuable tool for emergencies and short-term cash flow needs. But qualifying for a bank overdraft is often challenging. Usually, you will need to provide some form of collateral to secure the overdraft facility.
As your business grows and takes on larger orders, you’ll need to continually renegotiate with the funding provider to increase your limits.
Build a Cash Reserve
A cash reserve can provide a safety net in the event of an unexpected expense or growth opportunity.
It can be challenging to build a cash reserve if you’re in the growth stage of your business. But saving a small amount each time your business receives a customer payment can result in a substantial cash reserve over time.
Alternatively, you can look at your financing options and establish access to credit before you need it. A line of credit or Invoice Finance facility can give you peace of mind that you can access credit quickly if you need to.
Consider Equipment Finance
If you need to buy new equipment or machinery for your business, consider financing the purchase to avoid the high up-front cost. Equipment Finance can be an excellent way to spread the cost over a more extended period.
There are many ways to structure an Equipment Finance, ranging from a standard lease to a chattel mortgage. In some cases, you will take full ownership of the asset once you make the final payment.
It’s also important to consider the maintenance costs associated with buying new or second-hand equipment outright. Many Equipment Finance facilities cover servicing and repairs as part of the agreement.
Send Invoices Quickly
The faster you send out your invoice, the quicker you receive payment. It’s also important to make sure your invoice includes the due date in a prominent location on the page. If you offer early payment discounts or charge late fees, you should include those details on the invoice.
You may benefit from outsourcing if you don’t have a dedicated collections team. According to a 2021 report by Zapier, 33% of small business employees say invoice management is one of their most time-consuming tasks.
Many Debt Factoring facilities include additional account management services. Once you raise the invoice, the finance provider will handle collections. So you can focus on growing your business, not chasing unpaid invoices.
Early Payment Discounts
Early payment discounts can be an effective way to speed up customer payments. While offering generous credit terms can help you win new customers, you still need to maintain liquidity.
The discount must be weighed against any potential charges or interest servicing from financing. This might not be a suitable solution if you operate on small margins.
Cut Unnecessary Expenses
Effective cash flow management is not restricted to looking for sources of income only. You need to chart your expenses too.
You should always be looking to limit unnecessary spending, but this is especially important during periods when working capital is stretched. If cash flow is an issue, you should look to cut any expense that is deemed to be non-essential.
When reviewing your expenses, you should also look for any expenses you can delay. This keeps crucial cash buffers ready to deal with any urgent shocks.
Similarly, if you have a good rapport with your suppliers, you could negotiate discounts and better trade terms.
Supply Chain Management
Many businesses can free up capital by unlocking the value tied up in surplus inventory. Slow selling stock takes up storage space and keeps you from reinvesting in your business.
The easiest way to release these funds is to offer clearance discounts to your customers.
You can also improve supply chain management to increase efficiency. For example, you could keep a reserve inventory for immediate orders. Then, you could automate your process flows by notifying the supplier every time your reserve inventory is running low.
This will keep your business running smoothly while also preventing unnecessary losses.
Discover Your Cash Flow Options With ScotPac
Healthy cash flow allows you to grow your business sustainably. While increasing liquidity can seem complicated, it doesn’t have to be.
With the right planning and financing solutions, you can make sure your cash inflows always keep up with your outgoings.
Here at ScotPac, we help companies of all sizes to get the funding they need to grow. Our clients grow 3x faster than the average Australian business.
If you’d like to learn more about the cash flow finance options that can help your business, call us on the number below or use our simple online enquiry form.