Cash flow – Why is it so critical for your business?


It doesn’t matter if your business rules the market, is a big hitter or is simply starting out. Cash is key and cash flow is one of the most critical parts of any business.

Regardless of good or bad your sales are, if there isn’t a good amount of money flowing throughout the business, it will naturally fail. Even if profits are incredibly strong, if things go wrong and the business incurs bad debts, or has a few months with late invoices, it could put the business into a negative spiral of just staying above water. Fortunately, there are things which can be done to prepare businesses for cash flow, as well as ways of tackling the problems as and when they trouble the business.

So, how can you identify the problems that cause cash flow

Most of the time, problems with cash flow normally come down to a simple lack of planning. Putting together a cash flow forecast is essential preparation for a business, however, it needs to be done with every bit of detail involved. A forecast must include all possible incomings and outgoings, with all the potential long-term effects of paying loans and quarterly or yearly tax bills. How long will it take to pay off long term loans? Businesses also need to reflect on seasonal variations and if they can make enough money to survive quieter months.

Some businesses are simply just unlucky. It could be down to late paying clients, which leave businesses shorthanded, or a piece of machinery suddenly breaking. When it comes down to unpaid invoices, it slows up the whole process of how the business might work. Even if there are lots of sales coming in, if the money doesn’t follow quickly enough a business will struggle to keep its head above water.

Efficiency with incomings and outgoings are key

Any business needs to be continually planning and updating its cash flow, but there are some efficient ways of making the most out of a business’s incomings and outgoings. The prospect of controlling the flow of money in and out of the business on the front of thing appears an easy prospect. In reality, it’s much harder than meets the eye.

So, what are some of the most effective ways of being efficient with incoming and outgoing money?

  • Make sure your background checks are carried out on your clients, importantly assessing their credit history.
  • Be assertive with clients, if necessary, follow up on any clients who pay late.
  • Instead of collecting full payments, make it the business norm to collect up front deposits from clients.
  • Make full use of the businesses own outgoing repayments terms. If it helps to manage cash flow that bit better, pay on the last day of a 30-day contract.
  • If the business has regular suppliers, yet the business is struggling with cash flow, make sure you communicate with them and try to organise a later payment date.

Carrying out a credit check on clients is step number one. This gives you a key indication as to whether they are worth trading with in the first place. A credit check can be carried out fairly easily and will just give an idea as to how good they are with making payments. If, despite a good credit score a client still pays late, be assertive and ask for what you are owed. This doesn’t mean being overly aggressive, but simply sending out an email asking for payment.

The sooner money comes into the business, the better. This is why deposits can be hugely important and incredibly beneficial. The quicker money comes in, the easier it makes outgoing payments. Initially businesses might be hesitant to make a down payment, however, if they see that they can break up their payments into smaller amounts, it might make things easier in the long run.

When it comes to outgoings within the business, it’s important to be smart when it comes to spending money. If it’s beneficial to take advantage of lengthy repayment terms, then use that option. Instead of paying immediately, work out the day which will benefit the business the most and ease cash flow.

If the business already has bad cashflow, what should I do?

If things are already going wrong and cash flow is seriously suffering, it might seem practically impossible to get out of trouble. Thankfully, there are things which can be done, depending on the sort of reasons the business might be having issues.

For B2B businesses who are struggling with cash flow, invoice finance can be an excellent method of steadying the ship. If it’s late paying clients who are causing issues, invoice finance effectively allows a business to obtain an advance which is based upon the value of those invoices. A factoring company will lend you up to around 90% of the invoices value, after first assessing the quality of the invoices and the potential risks involved. If everything is ok, the factoring company will forward you the cash, before collecting it from the client, taking the money that they are owed along with their fees and then returning the change.

If it is issues with creditors and constantly having to make loan repayments. A CVA might be the best route to move forward. This is a formal procedure, which allows businesses to set up an agreement with their creditors. It means businesses can pay a monthly fee, towards their creditors without intense pressure. An arrangement like this can only be put into place, however, if the business has a genuine, viable future.

Bank loans are another solution, however, these are normally last case scenario. A bank would be hesitant to loan to a business which is having cash flow trouble, as it may suggest that the business simply doesn’t work. If a business could prove that the model is viable and they’ve simply had bad luck, then sometimes banks would be willing to loan.