Inconsistent cash flow can be a stressful experience for business owners. Unfortunately, many owners don’t know exactly what cash flow is and its profound impact on the success of their business.
First, what is cash flow? Accountants define free cash flow as the amount of cash coming into your company over and above all of your expenses. The most important thing for you to know is that it’s money in the bank that you use to pay your operating costs, payroll, expenses and inventory while waiting to get paid by your customers. In other words, cash flow touches many vital components of your company and, without it, your business could cave.
So, how can business owners keep cash flow pumping? Here are 3 rules to remember
Sales and profits are NOT the same things as cash
Truth: you can make profits…without making any money. You could double and triple your sales…and still be broke. Making the sale doesn’t mean you have the money in hand. The crux of the issue is not sales; it is customer payments. You could build and deliver your product on time and deliver the invoice, but not receive payments from customers for weeks or months. In theory, sales “mean” money, but when you’re dealing with B2B transactions, it’s not that simple.
The point is that every dollar tied up in unpaid customer invoices means a dollar less in cash flow. As a result, you may struggle to pay your bills, your employees and your suppliers, creating the perfect storm for business disaster.
Growth costs cash
All business owners want to grow their companies. But remember that the faster you grow, the more financing you’ll need. You’ll need working capital to buy or build your product before you can even sell it. And your suppliers will still need to be paid. The money required to fund new growth opportunities — which inevitably requires more resources and more inventory — can quickly drain positive cash flow.
Know your options
An experienced business owner knows that the ramifications of delayed account receivables are FAR more costly than the temporary costs of working capital financing.
One solution to customer payment delays is invoice factoring. A factoring company will purchase your customer invoices upfront, so you don’t have to wait for or worry about payment delays from clients. This solution will help you cover a lapse in cash flow for short periods of time, while the factoring company takes care of collecting on the invoice.
Invoice factoring is very common in industries where long receivable times are parts of the business cycle, such as automotive supply, trucking, freight brokers, staffing, manufacturing, technology, printing, oilfield, security, furniture, apparel and other service-based businesses.
From an ROI perspective, financing is almost always a better option than delaying employee payroll or turning down business opportunities. Plus, your time is your most valuable resource. It is better spent advancing and managing your business than trying to remedy a cash-flow crisis and matching outgoing payments with incoming checks. Having sufficient working capital in place provides your business with a protective financial cushion, so you can focus on your top priorities and sleep well at night.
Working capital is the best tool for your business survival kit
When you’re a small business owner on a tight budget, it pays to pay attention to cash flow and be prepared for any “what if” scenarios. The trick is to seek working capital financing even before you have a need. Having a reliable source of funding in place can bring tremendous business growth, not to mention peace of mind.