I hate to be negative, but so would you!

"The three most dreaded words in business are Negative Cash Flow"

A healthy cash flow is an essential part of any successful business. Some business people claim that a healthy cash flow is even more important than your business's ability to deliver its goods or services!

That may be placing a bit too much importance on your cash flow, but consider this... if you fail to satisfy a customer and lose that customer's business, you can always work harder to please the next customer or find a new one. But if you fail to have enough cash to pay your suppliers, creditors, or your employees, simply put you will soon be out of business!

Negative Cash-flow is the biggest killer when it comes to the survival of a business, and this can relate to simply not enough cash coming in, or an unworkable business model where cash is slow to arrive in comparison to what cash is going out. Eventually, something has to give, and all too often its the demise of what could be a great business!

So what steps can you take to improve cash-flow?

Something I stress to many of my clients is the positive of that favourite term 'Positive Cash Flow', and how this can help business growth!

First lets accurately define what exactly cash-flow is, it’s much more than just a fancy term, it demonstrates the workings of any business model…

In its simplest form, cash flow is the movement of money in and out of your business. It could be described as the process in which your business uses cash to generate goods or services for the sale to your customers, collects the cash from the sales, and then completes this cycle all over again.

Inflows. Inflows are the movement of money into your cash flow. Inflows are most likely from the sale of your goods or services to your customers, but could also be the return on an investment you have made. If you extend credit to your customers and allow them to charge the sale of the goods or services to their account, then an inflow occurs as you collect on the customers' accounts. The proceeds from a bank loan is also a cash inflow, but of course this has a regular outflow.

Outflows. Outflows are the movement of money out of your business. Outflows are generally the result of paying expenses, wages, rent, commercial mortgages, professional fees, loans or credit card bills, not forgetting your own monetary needs. If your business involves reselling goods, then your largest outflow is most likely to be for the purchase of retail inventory. A manufacturing business's largest outflows will mostly likely be for the purchases of raw materials and other components needed for the manufacturing of the final product. Purchasing fixed assets and paying accounts payable are also cash outflows.

One very common mistake made by new business owners who market and sell a finished product is not including in their forecasts the need for working capital. If you purchase product and have the extra expense of the business infrastructure, i.e., staff, premises and the many other considerations, you are reliant on seeing a strong inflow. If not, you can quickly run out of cash, and indeed you cannot replenish stocks as they deplete. I believe one of the biggest mistakes which leads to businesses failure, and most commonly occurs at the very first hurdle is not considering working capital, which can come in the form of a bank loan, angel investor, overdraft or your own investment into the business. I would stress the importance of a financial plan for any new business, but indeed any growing business where additional working capital is required to finance that all important growth.

The inflow on any business model has to exceed the outflow, but as discussed earlier the most successful business model relies on best practice when it comes to a speedier inflow than may be going out of the business.

Taking a positive approach to cash-flow…

Working capital – New or growing businesses need to finance the growth in the business, and make sure stock is replenished continually to feed sales. This could also be staff acquisition to expand the operational requirements – all requiring a level of working capital.

Early payment incentives – A common practice is to create early payment discounts which creates a quicker and healthier bank balance, which could be leveraged to influence lower costs from suppliers by offering them attractive repayment terms.

Favourable low interest borrowing – Loans or overdrafts are typical of this area. Improvements can be significant providing the business owner with cash, and cash in the bank certainly is king, but of course sales has to cover the repayment of any extra expenditure.

Invoice discounting or factoring – I believe this is the last resort in financing. It can be positive in providing an almost instant positive cash-flow, but also an expensive alternative to a loan facility. Also a consideration has to be made that you are putting a degree of control over your business with the factoring company, which for some can be an uncomfortable experience.

Negotiating extended terms with suppliers – Extended terms can be very beneficial, and closing that gap between seeing the receipts for your sales and paying out suppliers can drastically improve cash-flow.

The impact on a business with a strong positive cash-flow cannot be underestimated. It gives greater control, less pressure on the business owner, and more focus on growth rather than worrying about how to pay those overdue bills.

The only caveat to this is making sure you invest that positive cash-flow wisely for your next stage of business growth.

The last word is… if you don’t monitor your cash flow and maintain an ‘iron grip’, ideally 6 months in advance, your business could potentially run out of money, suffocate and die.

Six months planning will help you to see the threat and do something about it before it happens!

1 Response

  1. Very useful info. Thanks Stuart

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