Most businesses fail because of cash flow issues. Yes, there may have been mistakes, bad decisions or market changes along the way, but running out of cash, or not predicting a cash drought, is often the nail in the coffin.
Understanding your cash flow needs
The first step to managing your cash flow is having systems in place to know, understand and predict your seasonal or varied movements in cash. Some businesses, like a seaside ice cream shop run by the same family for 30 years, might just have their finger on the pulse of the business’ cash needs. Due to their longstanding history, they’re likely to have an easy understanding of what cash requirements they need to see them through the winter.
Other businesses, like technology startups, have far more complex cash flow needs. Cash is often needed to develop the technology before there is any revenue coming in. Forecasting when, how much and how quickly the cash will come in when the product is launched is crucial for keeping the business alive. It is also a vital factor in ensuring the business gets the investment it needs to start its journey in the first place.
If your business is very profitable but growing, you still need to be aware of the cash flow impacts as the investment in growth can be crippling. Even just managing the changes in your current assets can be a big issue. Take the below example of a growing business that makes products:
Year 1 Year 2
Revenue £2m £4m
Profit £1m £2m
Stock £0.75m £1.5m
Debtors £0.75m £1.5m
Cash £2m £1m
Revenue and profit have doubled in year 2 which is amazing! However, to support that growth, stock and money owed by customers have also doubled, tying up more cash, which means cash at the year-end has decreased from year 1. I appreciate this is an extreme example and there are many other factors to consider but it demonstrates the point – you need to know what cash flow issues you might be facing first, and well in advance, to enable you to manage them efficiently.
Overcoming cash flow issues
So, how can you manage your cash flow when you know you have an issue?
Review all costs
£100 per month may not seem like a lot, but over 5 years that is £6,000. When you run a small business, every extra £100 per month you can get pays dividends (literally) in the long run.
Assess the size of the issue
Once you have established your baseline costs, you can use these, coupled with your predicted income, to establish the predicted cash shortfall and long-term effects. This will allow you to establish not only how much cash you need, but also over what period of time.
Be realistic and even pessimistic
In predicting cash flow, it is often worth taking a slightly pessimistic view. Not enough to make you want to call it quits, but there is always going to be expenditure you haven’t planned for so having more cash is useful. There will hopefully be more income that isn’t planned for as well! In our cash flow forecasts, we often build in £x per month simply as a provision for unpredictable expenses.
Find a suitable solution
Now you have all the information you need to come up with an informed decision as to how to fix the issue. Below, I’ve listed various options for sourcing extra cash. They are in order of the easiest and most short-term fixes, going down to the longer-lasting finance options:
- Owner introduced funds
- Bank loan
- Asset finance
- Funding Circle (see our other blog here)
- Sales invoice factoring
- Investment/share sale
If you want more information on any of the above types of finance or you need our help managing your cash flow, please get in touch.