In the US, it has been suggested that some 82% of small businesses fail as a result of poor cash flow management. This trend is also prevalent in the UK, where SMEs account for 99.% of the total business population.
The reason for this is simple; as businesses need to generate enough cash from their daily activities to cover expenses and ideally bank a profit over time. This is especially important for new and startup ventures, which may occasionally struggle to cover their expenses when they start trading.
But what is the exact importance of cash flow, and what steps can be taken to actively improve the management of cash in a business?
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Addressing the Importance of Cash
As we’ve already touched on, a regular influx of cash is crucial for every small, medium or large business entity. After all, this enables firm to meet their everyday operational needs and cover the cost of delivering products or services, including marketing, sales and distribution.
However, new businesses may find themselves struggle to cover the cost of actually meeting demand and generating revenue, whether this relates to sourcing raw materials or meeting overheads before any turnover has actually been banked.
Additionally, clients may occasionally want extended invoice terms. This means that they may request to pay within 60 or 90 days as opposed to the standard 30-day terms, making the task of cash flow management considerably harder.
This is where funding can come in handy for new businesses. Funding for new businesses come in many different forms, from traditional bank loans and overdrafts to more innovative solutions such as invoice financing. Invoice financing is the act of using unpaid customer invoices to secure short-term working capital, which can be an extremely useful tool for businesses that are waiting on payments in order to meet their own financial obligations.
Investors are also a popular source of funding for start-ups and small businesses, providing the cash needed in return for a share in the business. If you want to learn more about investors, read this article about how startups find investors. You will be surprised at how easy it can be to find an investor once you know where to look.
Of course, every business is different and will have their own specific funding needs. However, in many cases, a lack of cash flow is often the primary reason why businesses fail. And that is why new businesses need to understand the importance of cash.
How to Improve Cash Flow Management
These cash flow challenges are universal, although they may be more prevalent in some industries than others. Regardless, the question that remains is how can you improve cash flow management in your venture?
Firstly, it’s important to focus on the management of your cash flow in addition to optimising real-time revenue streams.
In simple terms, this means ensuring that as much revenue or initial profit as possible is reinvested into company as possible. More specifically, money needs to flow back into the operational elements of the business when it’s in its infancy, ensuring that there are enough materials and sufficient labour to work and generate a consistent stream of revenue.
Next, owners may need to consider viable borrowing options that minimise the amount of long-term debt harboured by the company.
A business cash advance that’s based on projected earnings may offer an accessible solution, for example, especially if the company in question accepts card payments directly into their bank.
Conversely, companies may want to consider invoice financing. These essentially requires you to sell your accounts receivable or borrow against the capital already invoiced to clients, with this ideal for businesses that are bound by 60 or 90-day invoice terms.