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].