Managing and Financing Cash Flow
Businesses can experience rapid growth, especially if you are the owner of a new business or a business which has recently obtained a large contract for example. Business growth will be the main objective for many business owners, however it is vital that you understand and manage any potential cash-flow problems arising from this.
It is important to remember that as a business owner, it is likely you will have to pay the costs incurred from taking on new clients before you receive the additional income. This can lead to a cash deficit, with more money leaving the business than being received. Proper planning should be made to prevent the difficulties this can cause for your business.
Firstly, it is important you measure the cash you expect to receive and pay on a constant basis. A cash-flow forecast is used to analyse future cash deficits and surplus’. This will allow you to take the necessary precautions to manage and finance cash deficits. Failure to prepare for periods of cash deficits can cause major interruptions to your operations and sometimes bring your business to a standstill.
By recognising cash deficits in advance, you are likely to give yourself more time and possibilities in how to finance your costs. Here we look at a few of the ways to finance your business:
- Cash Reserve: keeping cash from previous cash surplus’ in the business can help keep things moving during times you are receiving fewer payments from customers. It would always be recommended for a business to keep a cash reserve if possible, however this is not always the case.
- Small-business loans: provide a low-cost way to borrow for your business, with rates from 1.9% per year. Small business loans are an ideal way to finance your business, however the application process can take a long time.
- Short Term Funding (Business Credit Cards/Factoring): this is often used as a quicker way of gaining finance, however interest rates generally tend to be quite high. Resorting to finance methods with high interest costs maybe a quick fix for current cash-flow problems but can be damaging to cash flow and profits in the long run.
Effectively forecasting your cash-flow can prevent major interruptions to your business. Planning for cash deficits in advance can also give you access to financing options with much lower interest rates. If you need assistance with cash-flow forecasting or how to finance your business, please don’t hesitate to contact us.