Why are cash flow forecasting tools key for small business owners?

Funding Options CEO Conrad Ford gives us some top tips as to how finance can help you maintain a healthy cash flow.

Maintaining good cash flow is vital for every business. In the day-to-day running of your firm, it can be difficult to make sure you’ve got enough cash available to cover outgoing expenses. Cash flow is affected by many different moving parts.

This is why forecasting cash flows and reporting tools like Futrli are really useful for business owners and accountants. You can keep track of income and spending now, while also looking into your future to anticipate any cash flow issues down the line.

It’s great to make a lot of sales, but you’ll still need to keep track of your expenses. Staff and rent need to be paid, as well as your suppliers, and handling these inflows and outflows incorrectly could lead to a missed payment or even insolvency.

Simple isn’t easy - what is a good cash flow forecast?

Every firm is different, and there are many different ways to manage cash flow. But there is one simple rule to follow if your cash flow is tight. Reduce your outgoings, or increase the money coming into your business to increase net cash. Sometimes, though, this is easier said than done!

It’s not just about avoiding negatives either. Good cash flow management means you can safely pursue opportunities that wouldn’t be possible otherwise. For example, a wholesale business with a big new customer will want to purchase a lot of stock from their supplier. Equally, it won’t want to overstretch itself by spending money it doesn’t have.

If you don’t quite have enough cash for a new project like this, use business finance to boost your working capital. There’s a wide selection of products on the market that could help.

Using finance for new projects

For instance, invoice finance means you get paid sooner for completed work, so you’ll have more cash available to pay for future projects even when you haven’t been paid for your last job yet. With this type of finance in place, your payment terms are effectively brought forward, maximizing available cash levels at any given time. The chances of a cashflow shortfall are lower too because the gap between money out and money in is smaller.

Businesses with buyers or suppliers overseas can suffer from even longer pay cycles. Trade finance is designed for this scenario and means the lender will pay your supplier, so you don’t have cash outstanding for as long. This can be combined with invoice finance too, so you’ve got both sides of the process covered from a cash flow point of view.

Have a backup plan

Maybe your cash flow needs aren’t this specific, and rather than funding an individual customer order you want more general coverage. Products like revolving credit facilities are a really useful safety net for when your forecasting was too ambitious, or the timings simply didn’t work out.

A revolving credit facility is overdraft-style funding that allows you to draw down funds whenever you need them, even if it’s just for a few days, so you can think of it like having a business loan on standby that doesn’t cost you anything when it’s unused (although there may be an initial setup fee).

Look at the bigger picture - beyond the cash flow statement

Sometimes, using finance for your cash flow requirements isn’t straightforward, but an injection of cash into the business can have a positive knock-on effect. For instance, one of our customers recently used a revolving credit facility to purchase a new vehicle. In turn, this allowed him to hire a new member of staff, which meant the business could serve more customers. Ultimately, this either wouldn’t have been possible without the external funding or would have put the business in a financially risky position.

In other cases, our customers have used a business loan to support expansion because the funding they had in place simply wasn’t sufficient for how quickly the company was growing.

If you’re already using Futrli’s budgeting and forecasting features, this can help you work out what’s best for your business with the help of a cash forecast— try inputting a range of different loan amounts and repayment terms to see how it will affect your cash levels in the future.

Tax bill funding

One aspect of good cash flow management is maximizing available cash when you need it. Even if you’ve been diligently putting cash aside for your tax bill, it will still take away a chunk of your working capital. Many firms choose to use tax bill funding to spread the cost. Lots of people don’t know that there are lenders offering finance specifically to finance a tax or VAT bill, and it’s not something you need to be shy about.

There can also be some tax benefits to using a loan to pay your tax bill – interest payments on a VAT loan are accounted for as operating costs. This can bring down gross profit and effectively reduce your corporation tax bill at the end of the year. Discuss these details with your accountant before signing anything, as every business’s situation is slightly different.

Conclusion

If your business is having difficulty keeping enough cash available, there are a few things you can do to boost your cashflow:

• Use a business loan for a cash injection
• Consider a credit facility if you predict occasional cashflow bumps
• Get project-specific funding like invoice finance and trade finance
• Sell or refinance assets
• Chase your debtors to make sure you’re paid on time

If you’re not sure what’s right for your cash flow situation, matchmaking services like Funding Options can help you narrow down the search. However you do it, improving your cash flow will help your business realize its full potential.

Conrad Ford is Chief Executive of Funding Options, recently described by The Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016. @FundingOptions