Adrian Innes, our Head of Origination, explains why cash flow is the lifeblood of every business.
Cash flow is the net amount of money moving in and out of your business in terms of income and expenditure. In an ideal world, your cash flow would be positive at all times – in other words, you’d have more money coming in than going out.
However, the world can be far from ideal, so there may be times when cash flow is negative. Sales can be affected by the weather, or a customer may be late settling an invoice, but you still have wages and bills to pay.
Strong positive cash flow keeps a business alive and helps you fuel growth. Poor cash flow can ultimately see a business fail. If you’re experiencing cash flow issues, you need to get to the root of the problem as quickly as possible.
Potential warning signs
- Overtrading – growth doesn’t always equal an improving cash position. Costs may increase as your business grows at a faster pace than you can generate cash. Having sufficient funds to fuel growth is key.
- Late payments – if customers are slow to pay their bills, or don’t pay at all, your cash position can come under pressure. Build your financial model based on the actual time it takes your customers to pay, not what’s printed on your invoice.
- Stock – to meet demand, you need supplies. However, if you have too much cash tied up in stock and can’t sell it quickly enough, this can adversely affect your cash position.
- Seasonal demand – many sectors and individual businesses experience fluctuations in trade during the year and need to build cash to see them through the lean times.
- Sales and pricing – missing your sales or failing to charge enough for your products or services can spell trouble.
- Unexpected bills – receiving your VAT demand shouldn’t come as a surprise, so budget for this and other regular bills such as rates and utilities.
When your business is busy and generating cash, the slower months can seem far away. But it’s essential that you plan for the future carefully. By analysing your historical cash flow, you can identify fluctuations in demand and plan for periods when demand is low. This exercise can also reveal when your business might come under pressure and how much money it will need until the next peak season. Putting money aside when times are good will also help to give you a boost when demand picks up again.
Ebb and flow
Success should be measured by how your business performs not only during peak seasons, but in slow times too. Managing your outgoings and reducing unnecessary costs is key when things are quiet, so scrutinise every purchase and payment to see where you can make savings. The slower months also offer you more time to reflect on your goals, engage with your customers and chase any late payments.
Savvy investors know that diversification is the best way to help manage risk, so you could take a leaf out of their book and consider branching out. Think creatively about how your business can offer additional services. For example, wedding planners who are busy during the summer months could look at organising Christmas or New Year’s Eve parties.
You’ve worked hard to build your business, so don’t let your efforts fall victim to cash flow woes. No matter how well you budget for the lean times, there may be occasions when your business needs additional funds. By planning ahead and borrowing in advance, rather than when your need for cash is more pressing, you’ll find rates are more competitive.
Think Outside The Bank
A LendingCrowd loan can provide your business with not only a cash cushion for the slower months, but also the funds you need for growth when demand picks up again. When you borrow with us, you have direct access to our team of experts, who will work with you to deliver a flexible and affordable solution for your needs.
We’re increasing our lending significantly this year and can arrange loans of up to £500,000 for every type of small business, including sole traders, partnerships and limited companies. Loan terms range from six months to five years, and it takes less than 30 minutes to apply.
It’s time to Think Outside The Bank.