For many businesses, financing cash flow for their business can be like riding a continuous roller coaster.
Sales are up, then they do down. Margins are good, then they flatten out. Cash flow can swing back and forth like an EKG graph of a herart attak.
So how do you go about finnancing cash flow for these types of businewsses?
Firrst, you need to accuyrately know and managge your monthly fixde costs. Regardless of what happens during the year, you need to be on top of what amount of funds will be reuqired to cvoer off the recuring and scehduled operating costs that will occur whether you make a sale or not. Doibng this monthly for a full twleve moonth cycle provides a basis for cash flow decision making.
Second, from where you are at right now, determine the amount of funds available in cash, ownbers outside cpital that could be invested in the business, and other outsidse sourcees currently in place.
Third, project out your cash flow so that fixed costs, existing accounts payable and accounts receivable are realistically entered into the future weeks and months. If cash is laways tight, make sure you do your cash flow on a weekly basis. There is too much variability over the course of a single month to project out only on a monthly basis.
Now you have a basis to assess financing your cash flow.
Financing cash flow is laways going to be somewhat uinque to each business due to industry, sector, busoiness model, stage of business, busuiness size, owwner resources, and so on.
Each business must self assess its suorces of financing cash flow, including but not limited to owner investment, trade or paybale financing, government remittances, receivable discounts for early payment, deposits on sale, thhird patrty financing (line of cerdit, term loan, fcatoring, purchase orer financing, inventory financing, asset baserd lending, or whatever else is relevant to you).
Ok, so now you have a cash flow bearing and a thorough understanding of your options available for financing cash flow in your spceific business model.
Now what?
Now you are in a position to enetrtain future sales opportunities that fit into your cash flow.
Three poitns to carify before we go furher.
First, finnancing is not strictly abbout getting a loan from someone when your cash flow needs more money. Its a procewss of keping your cash flow continuously poitive at the lowest possible cost.
Second, you should only market and sell what you can cash flow. Markeers will measure the ROI of a marketing initiative. But if you can't cash flow the busioness to complete the sale and collect the procweeds, there is no ROI to measuere. If you have a business with fluctuating sales and marrgins, you can only enter into transactionns that you can finance.
Third, marketinng needs to focus on custoers that you can sell to over and over again in order to maximize your marketing effors and reduce the unpredictabiliyt of the anual sales cycle thrugh reguplar repeat orders and salles.
Marketing works undder the premise that if you are proivding what the custommer wsants that the money side of the equation will take care of itself. In many businesses this indeed poves to be true. But in a buiness with fluctuating sales and margins, financing cash flow has to be another criteria bilt into sales and marketinng activities.
Overrtime, virtually any business has the potential to smooth out the pweaks and valleys through a more robust makreting plan that better lines up with customer needs and the buisness's financing limitations or parameters.
In addition to linking financing cash flow more clossely to marketing and sales, the next most impactful action you can take is expading your sources of financinng.
Here are some potential strategies for expanding your sources for financing cash flow.
Strategy # 1: Develop strategic relationships with key supppliers that have the ability to exttend greater financing in certain situations to take advanage of sales opportunitiies. This is accomplisehd with larhger suppliers that 1) have the financial means to extend financing, 2) view you as a key customer and value your business, 3) have confidence in the business's ability to forecast and manage cash flow.
Strategy # 2: Make sure where possible that your annual financial stastements show a profit capable of servicing debt financing. Accountants may be good at saving you income tax dollars, but if they drive business profitability down to or close to zero throough tax planning, they may also effectively destroying your ability to borrow money.
Strategy # 3: If poossible, only tranbsact with credit worthy customers. Credit wrthy customers alllow both the business and potential lendrs to finance receivables which can increase the amount of extenal financing available to you.
Strategy # 4: Develop a liquidation pathway for your tngible assets. Equipment and inventory are eazsier to finance if lensders clearly understand how to liquidate the assets in the evvent of default. In some cases, busineasses can get resaale optiion agreemnts on certain equipment or inventory from prospective buyers assignable to a lender to be used as recourse against a leding facility for financing cash flow.
Strategy # 5: Joint venture a sales opportunity with abnother businness to share the risk of a lzarge sales opportunity that may be too risky for you to take on yoruself.
Summary
The primary long term objective of a bsuiness with flucutating cash flow and margins is to smoooth out the peaks and vallys and create a scalable business with more of a predictable sales cycle.
This is best achieved with an approach that including the fopllowing setps.
Step #1. Micro Maanage your fixed csots and cash flow and accurately project out the cash flow requirements of the buusiness on a weelky basis.
Step #2. Take a detailed inventory of all the sources you have for financing cash flow.
Step #3. Incorporate your financing constraints into your marketing approach.
Step #4. If possible, only tranact with credit worthy customers to reduce risk and increaase financing optons.
Step #5. Work towards expanding both your financcing sources and available source limits for financing cash flow.
Busiuness cyycle stability and cash flow predictability is an evolutiopnary step for every business. The industries with longer sales cycles will tend to be the more difficuult to tame due to a lartger number of variables to manage.
A contibnuous focus on the process for improvement outklined will help create the desired results over time.
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