Managing Cash Flow

How can a profitable business have cash flow problems?

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Before we demystify how a profitable business can have cash flow problems, it’s important to understand the difference between profit and cash flow. Cash flow represents the closing balance of a business after deducting the cash paid from the cash received in a given trade period. Any business needs to have a positive cash flow to handle the day-to-day expenses. On the other hand, profit represents the balance between the revenue and expenses incurred after every sale.

Recent studies show that more than 80% of small businesses fail due to cash flow problems. This statistic is alarming, yet sadly many of these closures could've been avoided with the proper cash flow management system in place. And, accessing capital at the right time. So, what could be the main cause of negative cash flow for a profitable business?

Growing too fast

Most entrepreneurs get overwhelmed by the progress of their business and seek to open other locations too soon. This can lead to over-trading, which puts a lot of pressure on short-term finances. The main problem occurs when the new locations have to rely on the already established ones before they start generating profits. This can often lead to major cash flow problems.

Small Business Growth Capital, Explained. And When Your Business Needs It.

Advanced payments

Paying for expenses in advance could mean that there will be more cash going out than coming in. For instance, paying for insurance has a negative effect on the cash flow because there will be no money flowing in to cover this deficit. Such expenses are necessary, but they reduce the amount of cash available to keep the business afloat.

Giving too much credit

While offering goods and services on credit can attract more sales, it can also lead to major cash flow problems. Late repayments and bad debts leave your business with no cash to operate.

Acquiring long-term assets

Using the cash you have to buy new equipment for the business will create a big gap, because more cash will be going out than coming in. It's good to budget for such expenses after a trading period, once the accounts have been reconciled and profits identified.

Paying for loans

Loan repayments can also have a serious effect on cash flow because once the money is paid, only the loan interest is recorded as an expense when calculating profits. However, loan repayment means that more cash will be going out, not just the interest. This leaves a negative balance on the cash flow, which may not be reflected when you come to calculate your profits.

You can avoid cash flow problems by seeking professional financial assistance by LVRG, the #1 name in small business cash flow funding. Click here to contact us for the best financial advice pertaining to growing your business, or click the button below to apply for funding.

 

Why Cash Flow Loans Are Growing in Popularity Among Small Businesses

Why Cash Flow Loans Are Growing in Popularity Among Small Businesses

Why Cash Flow Loans Are Growing in Popularity Among Small Businesses

Cash flow is the life blood of every small business. Revenue is essential for businesses to invest and grow. However, a lack of cash flow can also bring a small business to its knees. In fact, insufficient revenue and profit is one of the main reasons 8 out of 10 businesses will fail.

This creates a difficult balancing act for small business owners and managers. How does a small business grow, develop revenue streams, and continue to manage their obligations like employee pay, vendor orders, and utilities? The cash flow is strong and further investment in the business could increase cash flow significantly, but where is that investment supposed to come from?

While there is no magic wand that can provide the answer, a cash flow loan is one important tool that allows small businesses the opportunity to invest in their future.

Even though these businesses may not meet the strict lending requirements set out by banks, there could be other creative borrowing options like cash flow loans that look at the underlying measures of success rather than broad qualifying criteria that doesn’t tell the full story about the business.

What Is a Cash Flow Loan?

Cash flow loans are a new concept to many borrowers. Since this is a non-traditional form of lending, you may not have heard about cash flow loans from your banker.

Simply put, cash flow loans allow businesses to use their business cash flow as collateral to secure a loan. This is perfect for rapidly growing businesses with good cash flow that need additional funds to take advantage of emerging opportunities.

Since cash flow is the main focus, factors like individual credit scores play less of a role than they would in traditional lending scenarios. For this reason, cash flow loans are sometimes more accessible to borrowers who would otherwise fail to qualify for a traditional loan due to their credit history or lack of business financials.

Simply put, a cash flow loan looks at a current snapshot of the health of the business to determine if the business can secure and support funding.

Why Cash Flow Is So Important

If you are currently running a business, then you know the importance of cash flow. Not only does cash flow cover regular expenses, but a cash flow surplus allows businesses to invest in their own operations and grow more rapidly.

Small businesses, especially new businesses, do not always have the funds on hand to pursue new revenue streams. Cash flow management can be very difficult as small businesses have to balance their day-to-day expenses with investing in growth.

In fact, cash flow is so important that it can be one of the most valuable ways to assess the strength and potential of a business.

Quite simply, businesses with a positive cash flow have the ability to invest in areas of their operation that will allow them to further grow their cash flow. As the old saying goes, success breeds success.

Comparing Cash Flow Loans vs. Traditional Bank Loans

Many business owners will go to their usual bank branch to seek lending for their small business only to leave disappointed. This is especially true for new small businesses that are rapidly building their operation, expanding into new areas, and pursuing lucrative opportunities.

Banks have a standard formula when looking at small business lending. Individual credit scores play a large role in determining if lending will be granted. In addition, banks often want to see a minimum of two years of business financials. For businesses that are less than two years old, getting traditional bank lending is often an uphill battle.

When securing a cash flow loan, lenders are much more interested in seeing the cash flow management of the business. Future cash flow potential may also be taken into consideration. These requirements may be easier for small business owners to satisfy.

Growing Business with a Cash Flow Loan

There could be dozens of opportunities for a small business to grow their revenue. Of course, taking advantage of new revenue streams means having cash available. This is where strong cash flow management and, potentially, a cash flow loan come into play.

When the bank says they cannot grant a traditional loan, what are business owners to do? Sit back and accept the situation as their competitors take control of the market?

A cash flow loan is an important tool for businesses that have proven cash flow but cannot meet the requirements laid out by banks. With a cash flow loan, business owners can invest in their operation, their people, and their own future success.

Want to learn more about cash flow loans and if this is the solution your business needs to grow to its full potential? Contact us today and apply for a cash flow loan from LVRG Funding – the number one provider of small business funding solutions.

 

Why Every Small Business Needs a Cash Flow Forecast and 4 Bonus Tips for Growth

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Statistically, roughly 80% of all small businesses will fail due to cash flow challenges. And sadly, most of the time these closures could've been avoided, with the right plan in place. Many small business owners seem to feel that cash flow forecasting is only for businesses in a cash crisis. Well, nothing could be further from the truth. This is one of the reasons so many small business owners wind up in a cash crunch.

Why do small businesses need cash flow forecasting?

A cash flow forecast can be a valuable growth tool, allowing you to make sure you have the right amount of money at the right time. Forecasting your cash can help you anticipate cash gaps and surpluses well in advance. Too many small business owners confuse profit with cash flow. Even a profitable business can be forced to close its doors if it runs out of cash. But a solid cash flow forecast can help avoid that, and let you know in advance when cash will be low so you can take steps to keep from running out. It can also help you find ways to maximize how much use you can get out of your cash. Here’s why every business needs cash flow forecasting.

Notice cash shortages

A robust cash flow forecast can help you spot cash gaps far in advance, allowing you to take action. This means that you can negotiate better loan rates, tighten up your credit control systems, and manage expectations with your suppliers.

Forewarned is forearmed and being aware of impending cash shortages can mean the difference between saving your business and waiting for insolvency. A cash gap may mean that you have to apply for funding.

Use a cash surplus to grow

For growing businesses it’s important to notice, and take advantage of, a cash surplus. With cash in the bank you have the opportunity to invest your money and grow your business. Seeing a healthy figure in your bank may be great but dust is the wrong thing you want your cash to be accumulating.

Cash flow forecasting enables you to know exactly how much you can reinvest in your business and when. By including a cash flow forecast in your financial management systems you can ensure that your business grows at a safe and healthy pace.

Tracking Your Spending

A cash flow forecast spreadsheet puts these together, breaking down incoming and outgoing cash by week, month, or quarter. A simple forecast would have entries showing cash on hand at the beginning of the period, expected expenses during the period, as well as expected receipts during the period. If the total at the bottom of any period's column is negative, a cash flow crunch may loom and action should be taken to avoid running out.

Many businesses have lines of credit to help with recurring cash shortages, and a one-time shortfall can be filled by taking out a loan. But, ideally, your cash flow should be managed to avoid these shortfalls and reduce borrowing costs in the long term.

Gain confidence in your financial systems

Profitability doesn’t necessarily mean that your business will grow, or that you have cash in the bank. A profit and loss sheet will only tell you part of the story. Without a strong grasp on your available cash, you’re not getting a true picture of your business’s finances.

Determine your break even point

You should know when your business will become profitable, not because it will affect your cash flow, because it won’t, but because it gives you an early goal to strive for and a ready-made target for projecting future cash flow. Negative cash flow and negative profits make for a grim combination. Focus your efforts on managing your cash flow with an eye toward reaching that moment when you realize your first profits.

Focus on cash management, not profits

Use your break even point as a benchmark. After you reach break even and your business is profitable, you still need to manage your cash flow, of course. You have reached another stage of your business’s life.

Cash flow forecasting can show you where you need to tighten payment terms, cut operating expenses, or hire new staff to carry the workload. Seeing the minutiae of how your cash actually moves in and out of your business can help you to identify areas in which you can improve cash inflows and outflows.

Regular cash flow forecasting is an essential part of business planning. It can make you aware of changes to your finances before you hit crisis point. Improving your awareness of how and when money is moving in and out of your business strengthens your ability to make the right decisions at the right time.

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BONUS!! Here’s 4 Simple Tips to Managing Small Business Cash Flow

Assess Your Fixed Expenses - Fixed assets are typically the easiest to manage. This includes items like loan repayments, rental fees, and insurance, which are typically due on specific days of the month. The important thing to manage here are the dates on which these items are due. Try to put some distance between the dates on which you receive funds from invoices and customer payments, and the dates on which you make your fixed payments each month. With enough days separating the two events, you may be able to bank your cash and create a small bit of revenue from interest depending on your account. Every little bit counts, and creating an internal system like this in the early days of your business can pay off later. As you grow, that small revenue bump may grow, too.

Estimate Variable Expenses - While some bills will always fluctuate from month to month, it is possible to determine a reasonable, educated range of your expenditures. For instance, the power company may be able to help you determine a close estimate of your monthly electric bill. When you are making these estimates, be sure to use the higher numbers; it is almost always better to estimate that an expense will be higher, rather than lower. Whatever is left over can be placed in reserve for an end-of-year bonus, a capital investment, or to help grow the business.

Regulate Customer Payments - If you offer some sort of payment plan for your customers, or if they have recurring fees such as membership dues, take stock of when these payments are due. If possible, sign up your customers on an automatic debit system so that you don’t have to worry about them forgetting any payments. It can also be beneficial for some of your customers, as they won’t have to worry about an account lapse.

Invoice Early - Keep strict records of your work, and make sure that you send an invoice to your customer as soon as the job is done. The more you delay, the longer it tends to take clients to pay. Send an invoice via e-mail the very day you are finished, and then consider following up with a paper copy. With an e-mail, you will have a time-stamped record of the invoice. It may be worthwhile to investigate online payment systems as well, which allow you to send an invoice through their website, and then receive an electronic transfer. Be aware that some of these services will take a percentage for handling the transaction, and that will affect your cash flow.

Simple adjustments can make a huge impact.

 

How do I manage cash flow in my local small business?

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It's not enough to earn a profit. Even a profitable business can be forced to close its doors if it runs out of cash. But a solid cash flow forecast can help avoid that, and let you know in advance when cash will be low so you can take steps to keep from running out. It can also help you find ways to maximize how much use you can get out of your cash.

Here are a few things that should go into forecasting your cash flow:

Reporting Accounts Payables and Receivables

A key part of a cash flow forecast is an accounts receivables report that shows how quickly customers pay. Create a spreadsheet and list all invoices sent out each month. Also, list the dates invoices were sent and the dates payment was received. Calculate the average number of days invoices were outstanding before being paid. This number helps estimate how much cash will be available for future dates. If payments take an average of 45 days, it will take that long for any invoice to turn into cash.

Cash Flow is the Lifeblood of a Small Business and Critical in its Growth.

Next, make an accounts payables report showing when bills must be paid for materials, supplies, wages, rent, and other essential items. List each expense, including when bills are received and when they are paid. Many vendors offer 30-day terms. Others require payment on specific dates, such as a landlord who may expect rent on the first of the month. Employees are usually paid in arrears, receiving paychecks from as soon as a week to as long as a month after they have performed their work.

Strong revenue but still don't qualify for traditional financing? A business cash flow loan may do the trick!

Tracking Your Spending

A cash flow forecast spreadsheet puts these together, breaking down incoming and outgoing cash by week, month, or quarter. A simple forecast would have entries showing cash on hand at the beginning of the period, expected expenses during the period, as well as expected receipts during the period. If the total at the bottom of any period's column is negative, a cash flow crunch may loom and action should be taken to avoid running out.

Many businesses have lines of credit to help with recurring cash shortages, and a one-time shortfall can be filled by taking out a loan. But, ideally, your cash flow should be managed to avoid these shortfalls and reduce borrowing costs in the long term.

Paying and Sending Invoices

Two goals of cash flow management are to be paid as quickly as possible while also paying suppliers no sooner than necessary. Getting paid quickly starts with invoicing promptly and accurately. Send invoices immediately when an order is shipped or when a service is provided. Consider electronic invoicing by email, or using an online invoicing system. Make sure invoices are accurate and have all the information customers need to make payments, including the address, tax identification number, phone numbers, and contact person for any questions.

Cash Flow Management Tips to Optimizing & Scaling Your Small Business

To manage accounts payables, start by prioritizing payments by due dates. The objective is to pay them when they are due, but not before. Sometimes it may make sense to make payments after the due date, if the cash can be put to better use elsewhere. If you ever need to consider paying a bill late, be sure to calculate the interest rates and any late fees your vendors may assess.

To encourage customers to pay quickly, consider offering discounts for faster payments. When customers are chronically late, consider tightening credit terms. You can also specify late fees or interest charges for late payments.

Managing Your Cash Flow Needs

Managing cash flow is vital for the health of any business, and you should look for ways to improve your cash flow while also protecting relationships with your vendors and customers. Creating a smart cash flow forecast can help maximize growth for your business—by spotting trouble before it arrives and making sure you always have enough money on hand to keep your business growing.

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10 Incredibly Valuable Tips for Boosting Small Business Cash Flow

Businesses big and small use a variety of cash flow strategies, such as getting advances on invoices, requiring advance deposits, and more. Going the more traditional route and applying for a bank loan may seem smarter, especially today with many of the big banks increasing their small business outreach and lending options.

However, if your small business were to find itself in a sudden cash crunch, a bank’s extended loan approval process could leave you unable to pay creditors and employees or buy needed inventory. Small business owners need to think creatively to keep their cash flowing.

#1. Advance on Invoices - Invoice financing is a great solution when you know your invoices will eventually get paid, but want the cash flow sooner. 

#2. Deposits and Partial Payments - Before starting any work, asking for a hefty down on large orders is a smart way to make sure you’ll get paid. Requiring a “security” deposit creates a safety net for your business, protecting it from rollercoaster economies around the world. Make sure you spell out the details of any upfront payment requirements in your contracts.

#3. Cash on Delivery - Requiring COD payments works particularly well when you’re working with new clients—at least until they establish a history of on-time payments.

#4. Payment Plans - If a customer won’t put down a deposit or pay early, consider setting up some type of payment plan so some money comes in on a regular basis. Negotiate monthly payments or payments at each stage of the project or relationship.

#5. Understand Your Operating Cycle - Regardless of size, every small business must deposit, monitor, and manage cash receipts; make payments; fund purchases; and invest in the company. Reviewing and understanding each step in this cash-flow cycle can help a company work more efficiently. 

#6. Layaway Plans - In the case of a highly anticipated or limited release product, consider establishing a layaway plan or offer customers a pre-sale discount. Customers are often willing to pay a premium for items they can’t get elsewhere.

#7. Leasing Equipment - You can save a lot of money by leasing equipment instead of purchasing it. Usually, lease agreements include a service contract, and you can take advantage of lower-cost upgrades when new technology is released.

#8. Review Your Payroll Process - If you pay your employees twice a month instead of every other week, you will be managing 24 payroll periods instead of 26 during the course of a year, making your company more efficient. 

#9. Sell, Sell, Sell - If you own equipment that’s outdated or obsolete, put it up for sale or auction. The same holds true for older inventory: Sell it for a discount to get a quick cash injection to your working capital.

#10. Obtain Capital - Capital is so important to growing a business. If you don’t have what you need for your business’s development, all you’re doing is paying your bills and just getting by. Having enough working capital to pay those bills on time every month is important, but to take your business further, it’s growth capital you should be paying close attention to. To do that, you have to understand how growth capital works, what it does, and how it helps your company develop from a small business to something much larger and stronger.

Cash shortfalls happen. The month you need to pay out for a ton of new inventory could be a naturally slow month for revenue; the need for major repair work could fall in the same month half of your employees worked overtime. Whether they are due to a slow season, lagging client payments or unanticipated expenses, cash shortfalls are survivable if small businesses look ahead and act early. As always, we’re here to help!