An introduction to cashflow
What is cashflow?
At its simplest, cashflow is – as the term suggests – the amount of cash being transferred in and out of a business on a daily, weekly and monthly basis.
What is positive cashflow?
If cashflow is positive, it means that more can be added to a company’s reserves which in turn will allow it to reinvest into moving the business forward, cover regular costs and future debts, or to pay profits to shareholders.
What is negative cashflow?
If cashflow is negative it indicates there is a shortfall in the amount of money held by the company which may impact its ability to operate or move forwards with its plans. Negative cashflow may be improved by borrowing funds, either as an unsecured loan or against the assets which the company owns.
What are the different types of cashflow?
There are three types of cashflow:
Operating – this includes all cash generated by the company’s daily business activities.
Investing – this includes the purchase of a capital investment or any investments the business makes in other ventures.
Financing – this includes all funds gained from issuing debt and equity and any payments made by the company.
Further to this, free cashflow is the term used to asses a company’s profitability. By assessing all of these factors, you can evaluate the financial performance of a business and help to plan future activity.
Looking for help with business cashflow in King's Lynn, Norfolk?
Why is cashflow important to a business?
‘Cashflow is king’ is a phrase often used to demonstrate the importance of cashflow to a business’ trading stability. By having available funds through positive cashflow, a company has the ability to weather financial difficulty, through periods of poor trading or despite adverse operating conditions.
Effective financial accounting and financial management are key to managing daily cashflow, particularly when a business is starting out and in its infancy, but even large, profitable companies can be adversely affected if there is insufficient or reduced cashflow to allow it to operate.
A quick look at a company’s accounts receivable (AR) will demonstrate the amount of money a company expects to receive for goods or services delivered but not yet paid for.
AR form part of a business’ balance sheet, along with stock inventory for some sectors, and is considered a current asset. Set against this is how much debt the company owes to its suppliers which are considered accounts payable (AP).
When a company invests in an item which has a life of more than a year, such as the cost of property or equipment, it is considered capital expenditure.
Looking for help with business cashflow in King's Lynn, Norfolk?
How can cashflow can be improved?
Financial flexibility is key to business success and the cash tied-up in the day-to-day running costs of a business will affect its ability to move forwards and grow.
Forecasting is an important first step to understand how fluid a company truly is at any given moment. Talk to customers and understand how your business fits into their requirements, and to confirm that your payment terms are likely to be met and invoices settled on time. It may be worth considering invoice discounting finance, which enables a company to release cash against up to 90 per cent of an invoice within 24 hours of it being issued.
Case study: Invoice discounting finance, King’s Lynn, Norfolk
A growing business secured a contract with a leading online retailer, the terms of which created a six-month funding gap. Complete Commercial Finance worked with specialist lenders to create additional working capital based on a hybrid of trade finance and invoice finance, which enabled the company to retain full control of its business equity.
Examine your costs and carefully track outgoings, including any discretionary spending. Ensuring that every contract is profitable – that it has a positive cashflow which is greater than the cost of delivering it – is a fundamental step to improving business cashflow.
Keep a careful eye on your supply chain and stock inventory. Be cautious about stockpiling which can impact a business’ working capital and maintain a good stock inventory to ensure you do not over invest working capital unnecessarily.
Increase working capital
Many businesses will rely on an overdraft facility to improve their cashflow and facilitate the day-to-day running of the business, but it is important to remember that a lender can call in this line of credit in part or full, at any time.
A business loan can be an alternative option to increase working capital and, so long as repayments are met and maintained, provides a long-term facility which offers stability to a business.
Case study: Merchant card advance, King’s Lynn, Norfolk
A north Norfolk leisure and tourism firm had its overdraft facility withdrawn after a change in banking policy, despite a bumper summer season. Unable to progress essential winter repairs without working capital, Complete Commercial Finance organised an unsecured 12-month, £80k advance against business turnover, with repayments staggered as a percentage of daily takings to enable lower payments during the quieter winter months.
While a single loan may provide sufficient funds, an alternative approach is to work with a commercial finance broker to identify the different assets within a business and borrow individually against these.
For example, a business may have property which can release equity, fixed assets such as plant & machinery which have a value, and its debtor book will also provide a line of credit.
While a traditional bank loan may consider all of these individual assets collectively and offer a lump sum loan against them, specialist lenders may view each asset individually and offer more funds against each in turn.
By working with an independent commercial finance broker such as Complete Commercial Finance, you may be able to increase the amount of borrowing for your business and increase cashflow to enable your company to move forwards.
