Now that the importance of budgets was discussed (if you missed it, here is our link Why are budgets crucial for small business growth to catch up) , let’s understand how cash flows can be useful through the expansion and the growth of a business.
It’s all well and good after completing your budget and deciding how you are going to expand – but now the big question comes in, how will you pay for it?
Yes, my budget shows a profit, but this may not convert to actual cash for another 2-3 months. How do you pay your normal trading costs and now the additional expansion costs? How much working capital do I need to enable my business to grow? A cash flow model will help you plan for those unexpected costs, changes in trading terms and paying your normal trading expenses. You will always have customers that will pay on time but there are also a large majority of them that will take just that bit longer – which for a large business would not cause too much concern but for your small business this could be a disaster. So how do we take control of this and make the cash work for us?
Key factors to start with:
- Analyse your debtors: Who pays on time, those that pay but take just a bit more time and those that will take 60+ days to pay
- Understand your suppliers: When do our suppliers need paying – am I able to negotiate extended terms if my customers don’t pay me?
- Prioritize paying employees and ATO
- Consider any additional new staff costs and equipment
The recent pandemic has shown many small businesses how important a good cash flow model is to help them keep trading. Being able to set up payment plans for your customers and your suppliers should the need arise; will ensure you stay on top of your cash and use it effectively to keep your business growing.
In case I need additional working capital, what can I do?
Taking out a loan is one of the common ways to raise funds, but it is not very flexible. But, what about using invoice financing?
About Invoice Financing:
These can be expensive (costs involved for upload of invoices and drawdowns of cash), but when used correctly is a great tool for keeping your cash flow healthy.
Typically you can expect 70-80% of your ledger to be available for you to draw down. You decide when you want the money and how much you need to maintain your cash flow. This means you can be paid for your invoices straight away and not have to worry about those customers who pay late. You are only charged for what you need. It is a very flexible arrangement.
Not only do they provide cash, but these companies can do all the debt collection. This then takes the pressure off and leaves you to continue to grow your business. Lastly, they can also take control of your AP ledger and payroll and thus ensure that your suppliers get paid on time too.
For small businesses, cash flow is of major importance and a failure to keep on top of this can result in the downfall or your business. Many small businesses fail to realise that even if they are making a profit, this does not necessarily translate into a healthy bank balance.
Ensure you have sufficient funds to weather the down times and make your business stay afloat and expand.