Cash flow is a major aspect of running a business. It’s the process of ensuring that cash coming in to the business is greater than the outgoing expenditure. Not having a steady flow of cash can result in late payments to suppliers, HMRC and even staff – in fact, the failure of up to 90 per cent of SMEs is due to poor cash flow management. The Office for National Statistics has shown that around half of the UK’s small businesses regularly receive late payments.
Profitability doesn’t mean a healthy cash flow
Cash flow issues can be particularly challenging when a business is just starting up, as there is usually a period where overheads and expenses are having to be paid before sales and the subsequent payments from customers are received. A business needs to be able to cover rent, the cost of stock, employees and operating expenses, which can be hard if there’s no cash. Many businesses find that they aren’t operating as successfully or aren’t as profitable as they could be, simply because they are struggling to manage their cash.
However, it’s not an issue that exclusively impacts fledgling businesses. In most industries, payment terms are on 30, 60 or even 90 days, with no guarantee that these will be paid on time – so even if an established business is making profit, the cash could still be tied up in unpaid invoices.
But good cash flow requires planning. Putting together a cash flow forecast to estimate the ingoings and outgoings of the business will give a more comprehensive overview of what to expect financially, and also highlight when additional funding may be necessary.
Choosing the best option
There has never been a wider range of funding packages available to SMEs but choosing the right option can be difficult. It would make sense to fund the purchase of a building through a commercial mortgage and a vehicle through an HP or leasing deal, but what about day-to-day working capital?
Invoice finance has seen a major increase in popularity as a source of working capital finance in recent years, so much so that it is now more widely used than traditional bank overdrafts. Invoice finance allows businesses to release up to 90 per cent of the value of its unpaid invoices within 24 hours of the invoice being raised. Upon payment by the customer, the remaining balance is paid to the business, minus the agreed fee. Having access to funds as soon as an order is completed rather than having to wait to be paid 30, 60 or 90 days later allows businesses to accurately plan their cash flow as it puts the control back in the hands of the business owner. Unlike a bank overdraft, the facility will also increase in line with sales and is not repayable on demand – business owners don’t even need to provide their houses as security!
So if you’re looking to strengthen your cash flow, invoice finance could be a way of helping you to maximise your business opportunities and let you focus on more important things, like growing your business. Our dedicated team of Invoice Finance specialists help SME’s across the UK access cash when they need it most – take a look at what we do.