How To Improve Your Cashflow #2

Once you have completed a cash flow budget it will be apparent as to how much cash you will need, when you will need it and why you need it. You may find that you will generate sufficient cash each month to meet the bills however others may find that their business is seasonal and has some months quieter than others. An overdraft facility is designed specifically for this purpose, to help pay for every day expenses whilst you wait for the cash to come in.

Some business operators believe there is a stigma associated with having to operate with an overdraft facility and that they are not efficient operators. This could not be further from the truth. Many profitable businesses experience peaks and troughs in their cash flow and need the overdraft facility to carry them through these times.

The cash flow budget can be used to predict these periods and help calculate the amount of overdraft facility needed. Once the limit is set, the business can use the available funds on a revolving basis within the limit. They will only pay interest on the funds they use eg. If an overdraft limit is $100,000 and the business writes a cheque for $25,000 using the overdraft facility they will only pay interest on the $25,000 until it is repaid in full.

Match the life of the loan with the life of the asset

One of the most common problems with the overdraft facility is that it is very tempting to write out a cheque for large items and worry about it later. The overdraft facility is provided to be a source of funds to pay for day to day expenses such as rent, wages, stock, electricity etc.

It is not provided to pay for what is known as long term assets. These are things such as cars, office fit out, forklifts,  equipment etc. Many businesses get themselves into financial trouble because they buy long term assets (they may not be able to afford) by using their overdraft facility.

This often uses up a portion of the overdraft facility not accounted for when the limit was set. This is fine when the overdraft funds are not required but when they are the business can come to a sudden halt. It is best to match the life of the asset with the life of the loan.

This means long term assets are funded using different types of loans such as leasing and business development loans. Speak to your bank and your accountant about what’s the best loan structure for you.

Impact of growth on cash flow

Experiencing rapid sales growth can be a great thing for business, but it can also be the downfall. It is important to manage growth properly. Many operators in this situation tend to see the sales going skyhigh, but as they put their hand into the pocket there never seems to be enough cash.

As businesses experience rapid growth they are constantly looking to add more services or stock on the shelf to keep up with demand. This demand tends to consume all available cash and a capital injection is often required to support the growth. History shows that it is difficult for a business experiencing such growth to generate sufficient cash internally and may need to look outside of the business for support.

There are four key ways that the funding can be sourced. Operators can look for new equity from an outside investor. This involves giving up ownership but could improve expertise. They can use net profits, which is often a limited source of funds and only a percentage of that required. They can use trade creditors within the given terms but again is a limited source of funds and finally they can go a bank. Among other things a cash flow budget will help support your case for growth and the need for additional funding. 

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