At the end of the month I sometimes struggle to cover my overheads, in particular staff salaries, supplier invoices and office rent.
It’s only because I have an overdraft facility that I’m managing.
The irony is that my company is doing very well financially but because a number of our clients pay several weeks or more after their invoices are due, that can hit our cash flow.
I’ve heard there are a number of cash flow solutions on the market these days but wouldn’t know where to start.
What are my options?
Even successful small companies often have periods where they struggle to meet monthly overheads
John Buchanan, performance senior manager at the chartered accountants HW Fisher & Company, replies: This is an extremely common problem for businesses, especially SMEs.
Even successful small companies often have periods where they struggle to meet monthly overheads.
Yet without ready cash to make these vital payments, a small business – which is unlikely to have big cash reserves – may not survive.
With both the national living wage and some business rates due to increase in April – both of which could put an extra strain on your business’ finances – it’s essential that you start to gauge the likely impact on your business now.
It is crucial for your business to have the right finance in place. Inappropriate finance can be expensive and, if it’s not sufficient, prevent your business from growing.
Relying on an overdraft may not be the best option available. Overdrafts can be expensive and are usually repayable on demand, which means at any moment the bank could request payment of the overdraft in full.
Banks are also reducing the number of overdrafts made available to businesses, so it is a good idea to look at other options now.
John Buchanan: The first step is to put together a cashflow forecast
1. Forecast your cashflow
Before you do anything else, the first step to take is to put together a cashflow forecast.
This forecast estimates all the cash inflows and outflows of the business – when you are expecting to be paid by customers and when you have to make payments – and how much and how this affects your available cash.
There are many cashflow forecast templates available online or, if you are unsure, it is best to seek the help of your accountant or a financial adviser who can assist you in putting the forecasts together.
The cashflow forecast will give you an indication of the extra funding that your business requires and help you identify any difficult months, especially if your business is seasonal.
It is usual for a potential finance provider to request this forecast when you apply.
2. Review your options to raise available cash
Secondly, see if there are other ways you could increase the cash available to your business.
By making these small changes you could find your cashflow improves and your business requires less finance.
FIVE TIPS TO IMPROVE CASHFLOW
· Send invoices in a timely manner
· Make sure your debt collection procedures are robust
· Send reminders to clients before invoices are due
· Try not to hold excess stock – holding less stock could free up cash to spend elsewhere in the business
· Try to agree improved credit terms with your suppliers
3. Find the right sort of finance
Once you have gone through the first two steps it’s time to consider your finance options.
There are a wide range of options and their availability and suitability will depend on what your business does, how much it needs and the assets it has.
Most lenders will want a form of security from the assets of your company and will also often require a personal guarantee from you as a director.
Here are some examples of the finance that may be available.
Bank loan – A traditional bank loan repayable over an agreed period. This will often require the assets of your business to be sufficient to cover the total amount of the loan in the case of default.
Invoice discounting or factoring – Invoice discounters will loan your business a proportion of the value of its invoices. This enables a business to obtain cash immediately upon issuing an invoice rather than waiting to be paid.
Peer-to-peer lending – Rather than a bank loan, online lending platforms are an alternative way to secure a loan and can be a quicker alternative.
Trade finance – Normally for large contracts. Trade finance providers will advance you cash to complete a specific order and then collect the sale proceeds from the customer providing you with the difference less their charges.
Cashflow loans – Distinct from traditional bank loans, these loans are often more expensive but available quickly.
Equity – An investor may be willing to purchase shares in your company providing additional cash but your ownership of the business will be diluted.
The above are only a few of the finance options available. My advice would be to talk to a financial adviser who specialises in business finance.
Once they understand your business and its needs they can advise you on the most suitable type of finance, the interest costs and charges, introduce you to a range of finance providers and make the whole process much quicker and smoother.
Given that cash is lifeblood of your business it pays to get it right first time.