Cashflow is King
For any business, cash really is king. Without sufficient cash, even profitable businesses can and have failed. A big example of this is Independent Energy, based locally in Solihull, who collapsed in 2000 as it was owed more than £119m from customers whom it had supplied electricity and gas but had not been billed. They were hugely profitable on paper but their debts remained unpaid and they simply ran out of cash.
This sort of situation happens to hundreds of small businesses across the country every year. They are making profits on paper, but not generating enough cash to remain in business. Examples of this include:
1) Investing existing funds into buying new assets. A new asset may end up generating extra profits for years to come, but if not correctly funded, this new investment may mean you don’t have enough money to pay your short term suppliers.
2) If you chose to borrow money from a lender charging high rates of interest in the past you may find you aren’t making enough money each month to pay off the combined total of the high interest rates and original capital amount you borrowed.
3) Slow repayment of invoices by customers. On paper your sales and profits may look great, but if your customers aren’t paying you on time then cashflow can get tight quicker than you realise, especially if you are having to pay your suppliers and other debts on time.
The key therefore is to be able to manage your cashflow effectively, so you know what inflows and outflows are likely each week. You can then plan when to make payments and have time to acquire additional funding if it looks like cash is going to be tight at a certain point in the future. This is immensely important – the last thing you want to do is go unexpectedly overdrawn and face difficult questions from your bank which you are struggling to answer.
If you know about a cash issue well in advance you can discuss it with your bank who may well be able to offer you help, be it over the short or longer term. If they can’t, it gives you time to look elsewhere in time to secure additional funds at the right rate from the right source. (Sources of additional funding can be found elsewhere in my posts).
As well as helping in the short-term, a detailed and accurate cashflow over a number of months or years is also a key tool in securing long-term bank funding. This can often be the difference between success and failure for many small businesses.
DMF Accountancy are experts in producing detailed cashflow information that fits in with your business that you can easily understand and therefore act upon. Contact us to find out how we can help you develop a cashflow forecast to help your business stay cash positive.
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