Significance of Cash Flow

Your cash flow is a critical determinant of success. Find out how it can make you sink or swim.

It goes without saying that without a healthy flow of cash your business will struggle, at best. The increasingly competitive nature of all industries necessitates agility and speed, particularly if your business is nascent. Even if your company is mature, without strong cashflow you may not be able to follow through with your existing plans for expansion or make needed changes. Or worse, if there is significant disruption to your business for reasons outside of your control (i.e. a key supplier goes down), your cash flow becomes your life line.

Your Cash Flow Statement

As a venture debt provider, we analyse a company’s financial performance to assess whether they might make a good partner. And while balance sheets and P&Ls are important to our process, the Cash Flow Statement is particularly crucial because we can deduce the company’s cash runway. As a high level guideline, companies with less than a 6 month runway tend to be riskier, making it tougher to raise capital.

The quality of your cash flow can be determined by whether there was an increase from previous years, where the cash is being allocated (i.e. R&D, investments, etc.), and how your net cash flow compares to your net profit. This last point is particularly important and deserves its own discussion.

Savvy Receivables Management

How you collect payment from clients has an enormous impact on your cash flow. Depending on your industry, you might be collecting payment from clients before delivering your service/product, or the other way around. Education typically falls under the former, where tuition for a semester is paid at before classes commence. The same can be said for subscription-based products, like Spotify or Netflix. Companies like these should, in theory, have a positive cash flow and if it is sufficient enough they can run their operations without taking on any externally-sourced capital.

If you have a lot of upfront expenditures, such as purchasing inventory, you risk running out of cash even if your business is profitable. This is where managing your receivables is critical and should be a priority communicated to your entire organization. Here are some top tips you can leverage:

  1. Wherever possible, ask customers to pay cash on delivery.
  2. Choose credit worthy customers.
  3. Set a time cap on credit terms so that your customers aren’t arbitrarily prolonging payment.
  4. Leverage government financing schemes (e.g. Temporary Bridging Loan) to plug the cash gap in times of need.
  5. Establish a relationship with a trusted debt financing partner to ensure you have access to capital as and when you need it.
  6. Manage your payables so that your outflows don’t exceed your inflows.
  7. Offer small discounts to customers willing to pay early.
  8. Insist on collecting a deposit as a percentage of the sale.

Whatever the nature of your business, keeping close tabs on your cash flow will support your planning efforts and help sidestep problems. For a more involved discussion on boosting your cash flow, give us a shout at [email protected].   

How Your Credit Score Helps You Raise Capital and Manage Risk

This article aims to help you understand more about the importance of a Business Credit Report.

Raising Capital

Unless your company is flushed with cash and you never have to worry about capital ever again, you’re probably faced with a common problem: getting money through the door is challenging and expensive. While skilled negotiation, an airtight business plan, and convincing managerial experience can take you far, there is another often overlooked tool in the fundraising toolbox that can be leveraged to take you even further: a strong credit score

When people think about credit scores, they think about individual credit scores. A person’s score has several useful and arguably necessary functions. For example, the score can determine what kind of loan you get and the rates you pay. It can also determine your insurance premium, how much you spend on your cell phone plan, and whether the landlord asks you to put down a one- or four-month security deposit. Your individual credit score, therefore, affects how much money you can access and whether you’re saving a bundle or getting hammered. In other words, with a good score people will find it easier to trust you.

Fortunately, the same credit score principles that apply to an individual can have the same impact on a company. If your company needs a working capital loan and your credit score is stellar, you’ll be able to get more cash at cheaper rates than if you couldn’t provide a score at all. If your company is looking to rent a larger space because you’re expanding, you can use your credit score to negotiate a better monthly rental and park less of your money in the security deposit. In other words, with a good score you will have more bargaining power and less cost.

Managing Risk

Raising capital is just one of the ways your credit score can be beneficial. Let’s say you run a coworking space, full of space for bright eyed startups who need are looking for a place to establish themselves. Some of them are well-run, some of them aren’t, which means that some of them pay on time and some of them may not. If you could get a quick health check on all your occupants, you’d know exactly who to talk to and who looks like they might be struggling and avoid potentially incurring bad debt. And for the companies who have great scores, you could consider offering a reduction on the security deposit to keep them happy with staying in your space. 

If your business is heavily dependent on certain players in your supply chain, having an eye on their financial health and getting their credit score can help you avert a major crisis by looking for alternatives before a portion of your network goes under. On the other hand, if these entities have strong scores, you can improve your relationship with them by providing them better terms. 

LyteScore

So how do you get a viable credit score? Simple, send us your financials and your AP/AR aging reports and we’ll churn out one Business Credit Report, according to your preference. We have two credit reports: “Lite” and “Essential”. “Lite” report is quick and easy: you’ll get your score and a breakdown of your financial metrics. If you need something more involved, our “Essential” report will give you everything the Lite report does, plus an in-depth analysis of your finances. You can apply insights gleaned from the report to tighten up areas of your business and/or use it as leverage when navigating a capital injection.  

To benefit from all of the above, e-mail [email protected].