Every business needs adequate cashflow to stay afloat. Let’s take a closer look at the importance of cashflow in a business, some different credit options, such as long term loans and when a business needs to use them to avoid cashflow problems.

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Learning Highlights
  • The importance of cash flow to businesses
  • Causes and the effects of cashflow
  • How to manage cashflow
  • Forecasting to estimate cashflow
  • The time to get credit

Even profitable businesses need to make sure that they have enough cashflow to cope with any unexpected expenses or a slow month of business. A company that fails to keep some money aside to pay its staff and suppliers could result in becoming insolvent.

When a business spends more money on staff and supplies that it makes during the month, it could find itself in trouble. Perhaps this is a sign that the company is not profitable when analysts predict figures of high outgoings and low sales for the future. This is called a projected cashflow problem.

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How do cashflow problems develop?

For most businesses, cashflow problems result from failure to check financial statements regularly and deal with issues before they become unmanageable. Even profitable companies can find themselves in financial difficulty through the time that it takes to ship products and the time that it takes for customers to pay and the business to receive the funds. Sometimes it might be necessary to take out reliable flexible loans to keep the business afloat.

Companies that do not manage their cashflow correctly can end up going bankrupt. Without cash to buy assets and other essentials such as equipment and stock for the business to operate correctly, a business could soon get into trouble. Good profits are great for a business but to work properly a business needs cashflow.

So what have we learned so far?
  • Without cash to cover any emergencies, a business can become insolvent.
  • When the outgoings of a business are more than its incomings it can get into trouble.
  • This can happen when business’ do not deal with issues and they become more significant problems.
  • Shipping and payment delays can fuel cashflow problems.
  • A business can improve by cutting costs and increasing profits.
  • You can tailor financial help to a company’s needs.

How can you manage your cashflow?

There are a few ways to improve the cash flow of a business that is having difficulties. The first way is to take a good look at the business’s outgoings and try to find ways to cut costs. The second way is to try and increase the amount of money that the company is generating. As each business operates differently, it will need to find solutions tailored to their specific needs. There are some finance options for a business that has a cashflow problem, but which they choose will depend on the kind of company that it is.

By using a cashflow forecast template online, or asking your accountant to help you, you can create a prediction of all the inflows and outflows of the business. These will also include future payments and receipts, including the dates. You will be able to predict any coming months when you may have a shortfall of cash. Once you have done this, you can estimate extra funds that you may need.

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When it is time to get some credit?

Once you have completed the forecast and have tried to get cash flowing into your business without success, you may need to find the right credit option for your business. Most lenders will want the business’s assets as security for a loan. The kind of finance that is right for your business will depend on its nature and its circumstances. A company that has a short-term cashflow problem may need a short-term business loan, or a seasonal business may find invoice finance better. There are many different solutions available some of which include:

Getting a bank loan

A typical bank loan, with the best personal loan rates, for a fixed period, will often want the assets of your business to cover the value of the loan in case you default.

Invoice finance or factoring

This a method of using a proportion of the value of a business’s invoices before they have been paid. This allows a business to get their hands on ready cash as soon as an invoice is issued.

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Peer to peer lending is a fast option

An online lending platform is an alternative way to lend money that is becoming increasingly popular. This form of lending money can sometimes be a quicker alternative to borrowing money from a bank.

Payday loans for short-term cash

A payday loan can offer a fast cash injection, many times on the same day if a business needs instant cash to tide them over for a short period. As with all short term credit, payday loans are expensive but can be handy for a quick source of cash in an emergency.

Trade finance

Providers of trade finance usually operate with big contracts. They provide cash for big orders and then collect their money from the proceeds of the sale from the company, giving the business the difference minus their charges.

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Raising money from equity

An investor could buy some shares in a business, but then the ownership would be diluted.

So what can we conclude about cashflow problems in business?

Having a limited cashflow can cause severe problems for a business. Not paying staff and suppliers can lead to insolvency unless a business can get credit to see them through. When cost-cutting and the speed of payments cannot be sped up, many companies have no choice but to rely on a loan or another source of credit. Credit is costly but a necessity for some businesses who would face bankruptcy without a cash injection.

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