Have you ever faced a stress-inducing problem but did nothing to fix it — simply because you were scared of doing the wrong thing? Sure…we all have. But what if that stressful situation was related to your business cash flow? Doing nothing could actually lead to the demise of your company.
However, ‘fortune favors the brave’ and to increase cash flow, businesses often need to do something different in order to bridge the gap.
Outsmarting cash flow problems (via better budgeting)
When faced with a financial crunch (or if you want to proactively avoid one), it’s important to first understand how long your existing cash will last.
A cash flow budget is your answer, as it shows you how much money is flowing in and out of your business. The goal is to be cash flow positive — meaning you have more money coming in than cash going out of the business at a given point in time.
Preparing a cash flow budget will help you:
- Predict and prepare for anticipated shortages
- Show creditors and lenders the status of your company’s cash position
- Prioritize key expenses to ensure that even in the case of difficulty or loss, there’s still enough cash to cover the essentials
- Analyze what is causing shortages, such as seasonal changes, for better future cash management
New to budgeting? No problem. Learn the seven steps to creating a cash flow budget.
If you develop your cash flow budget and discover an anticipated shortcoming, what should you do next? The trick is to take action before it becomes a major problem…
Staying a step ahead of the stress
To illustrate an example, imagine a shoe company has stepped into a cash flow crisis. They manufacture and sell merchandise in bulk to retailers and resellers, and while sales are good, they are regularly awaiting payment on their 90-day payment terms. Having recently repeated this process with a number of big orders and suffering payment delays, the shoe company is left with no cash on hand — and no inventory.
Understandably, this cash flow gap has a ripple effect throughout the business since they can’t accept new orders (requiring supplier and employee payment) or expand operations. So what are they to do while they await payment?
Factoring is one alternative, which allows the business to effectively sell their unpaid invoices to a third party, known as a factor. The factor pays around 70 to 85% of the invoice upon sale and then collects the payment directly from the shoe company’s customer. This will enable them to continue producing more shoes, write more invoices and grow the business despite awaiting collections.
Need a refresher before jumping into the cost of doing business and how factoring help? Take a quick review of the essentials of this solution here.
Serenity now: Budgeting and factoring are the perfect pair
When you combine cash flow budgeting with factoring, you can start to stride past any cash flow crunch. Forecasting months ahead, businesses can predict when their outflow will start to overcome their inflow — and can take the right action to factor invoices in advance.
That puts you in control of the situation, as opposed to waiting for a customer to make a payment (which can sometimes be unreliable). Since factoring allows a business to reliably predict cash inflows, you can better plan for the future while building credit with both suppliers and banks. In turn, your business can also make outgoing payments on time, continue to improve sales, show more income on the books, and ultimately improve your ability to secure additional financing for long-term growth.
Explore how to find the right factoring partner as a potential way to solve cash flow woes. Download The Invoice Factoring Guidebook.