In his song Good Life, Kanye West says: “Having money’s not everythin, not having it is.” And when it comes to business, never a truer word was spoken (or rapped).
When you think about a business with cash flow issues, what kind of picture do you build in your mind? Usually, it’s one of an organisation struggling to keep their heads above water. We picture unmanageable overheads, overdue invoices, a lack of sales. We see failure. But that isn’t always a fair assumption.
Negative cash flow doesn’t always mean poor financial performance
A business’ cash flow problems are not necessarily related to lack of profitability or an unviable business model. Even successful businesses with healthy balance sheets go through periods where they experience a lack of working capital. But why?
A profit and loss statement shows a completely different cross-section of your organisation’s financial health than a cash flow statement. Your business may well be showing a healthy profit, but cash may be a little scarce – this is a situation that almost all businesses experience at some time or another. Poor cash flow does not always signify profitability or viability issues, indeed more cash in the business is often required during periods of growth rather than contraction.
What are the ramifications of poor cash flow?
Profit is “Jam tomorrow” but cash is the lifeblood of a business, and without it you can’t pay your overheads when they fall due, this in turn can lead to urgent requests for borrowing facilities leading to greater debt, interruptions to the supply chain, and ultimately business failure. But far more commonly, cash flow issues are not so severe that a business cannot pay their staff or their invoices (though not always on time), but it can frustrate growth and cause many a sleepless night.
Lack of working capital can translate to a lack of flexibility. Businesses need to be able to adapt and act quickly and access to free flowing working capital can provide the kind of agility that can help a business to avoid disaster and seize opportunities. An inability to take on a contract could grossly affect profit margins or prevent a business from breaking into and exploiting new markets. An inability to take advantage of a price reduction for prompt payment or invest in stock can leave a business paying over the odds and reduce profit margins. New hires may need to be put on hold, which can lead to competitors gaining the advantage of valuable talent ahead of your business. Upgrades to offices or equipment need to wait until the funds are available, resulting in wasted time or lost productivity. Prospects are limited as opportunities are turned down, all leading to a business unable to reach its full potential.
What is the leading cause of cash flow difficulties?
The main reason why successful and profitable businesses can suffer from cash flow problems during growth periods is over-generous credit terms extended to clients, poor payment behaviour and the lack of professional credit control.
Payment terms and late payment can be a controversial issue for all businesses, but the more access to cash you have the less likely you are to be impacted by extending credit terms and the better their relationships can be between customer and supplier.
In the UK, the payment terms of 30 days are standard, but it is commonplace for large firms with huge procurement departments to impose 60 and even 90-day terms on their suppliers, and then even exceed them wherever they can get away with it.
Government pressure for businesses to play fair and pay on time is having a positive impact on the UK’s late payment culture, but poor payment practise is still commonplace and can have a hugely significant impact on cash flow for SMEs, startups and family-run businesses.
At any one time, the average SME is owed £25k in overdue invoices – a sum that might not be make-or-break for a large business with a healthy cash flow statement, for a smaller business with shallower pockets it could be fatal.
How can businesses tackle their cash flow issues?
In previous blogs, we have addressed the issue that the majority of growing businesses will face a shortage of cash flow, but they are also likely to face barriers to traditional lending as banks and other lenders become more reluctant to extend credit to growing businesses in the face of financial uncertainty.
A lack of cash and a lack of access to borrowing can lead to severe difficulties and even insolvency. Invoice factoring and discounting are both funding methods with similar principles that fall under the alternative finance umbrella.
Rather than accumulating debt that must be paid back at a later date, the business can instead access the cash tied up in their unpaid invoices turning sales made on credit into cash in the Bank now.
When the client pays, the debt is settled, but the business has been benefiting from the access to improved working capital and has been able to put it to use in achieving business growth and improvements for the last 30-90+ days. That much-coveted agility has enabled them to grasp opportunities they otherwise would have passed over had the cash not been in their pocket.
Depending on the type of invoice finance agreed upon with the factor, the business may also benefit from the extensive credit control and relationship management experience of the factoring company, improving how their accounts are settled and managed.
To be eligible for invoice finance, your business should operate in the B2B arena and provide services to other businesses and organisations on credit terms.
Your business can unlock working capital and avoid debt
At Partnership Invoice Finance, our client base includes businesses who are generally operating in industries where there can be a huge gap between the product or service being delivered (and an overhead incurred) and a payment finally being settled. These include organisations like recruitment consultancies and other professional service providers, businesses within the manufacturing or logistics industries and printers. Working alongside these clients we are also able to provide credit ratings for their debtors and provide access to selective or whole turnover credit insurance protecting those valuable invoices from the ravages of bad debt.
If you are interested in gaining access to the cash tied up in your sales ledger so you can make spending decisions today rather than relying on payment runs tomorrow, contact us now to discuss your needs.