Cash is known as the 'oxygen' of business life, but cash-flow is often cited by business owners as one of their biggest challenges.
Cash-flow problems can crop up – or be exacerbated – when business owners haven't thought about the 'rhythm' of how they spend their money, versus how they collect it.
Business Financing Tips By Andrew Banks
The two key levers that let you better manage and respond to the rhythm of your business are the accelerator of marketing and expansion, versus the brake of collecting payments and paying debts.
Many business owners don't realise how much their own actions can control their cash-flow. Analysing your terms of business – the timing and method of payment and deliveries – may help you take control of your cash-flow. If you're able to change your approach by thinking about win-win solutions for your payment terms, you may find different arrangements to help reduce pain down the line.
One place you may want to start is looking into the terms you have in place with your suppliers. You might consider negotiating a compromise with suppliers who require up-front payments. For example: you may suggest to a supplier that if you place an order over a certain amount, that they will accept a 20 percent deposit, with the balance due in 30 days. Your supplier benefits because you place larger orders in return for additional cash-flow days.
Another option you might want to consider is to pay your supplier by credit card. Some credit cards offer up to 55 days interest-free.
Checking the payment terms you have with your customers is a great next step you may consider. Ask yourself, what can you do to help them pay on time? Perhaps you ask for a part-payment when they place an order. Or look at your business processes: does it take you a few days to issue an invoice? Shortening that invoice cycle may help.
Many industries have standard payment terms that most businesses take for granted – but you don't have to accept those if you can come up with a good reason for an alternative.
For example, when I Co-Founded recruitment firm Morgan & Banks, we did a huge amount of business in the temporary staff area. At one stage our temporary staff division hired out around 12,000 temporary staff, from CEOs and engineers to accountants, draftsmen and labour hire. Those 12,000 people turned up to work inside our customers' businesses – but on our payroll – each-and-every-day, turning over about $600 million in gross payroll revenue.
Normally in the industry, you would pay temporary staff weekly or fortnightly, and bill the clients monthly. This was a big impost on our cash-flow – but there was also a downside for many of our clients. Some of the biggest companies with 10,000 permanent staff might have more than 50 temps in at a time, and those temps sometimes rolled up to the business each day for months. Often it wasn't until the invoice came in that the client realised they didn't need some of these temps for as long as they were there, or that perhaps they now needed some temps with different skills.
We talked to clients and offered to invoice them weekly so they could keep track of who they had on the ground, and in what role.
That helped us improve our cash-flow because funds came in much faster – and it also helped our clients because they had better control over their spend.
Other strategies can include launching a joint venture with a supplier, so that you're not directly invested in doing things that cost you money. Sure, that might mean you hand over some of the revenue, but it also gives you the opportunity to grow more than you may have otherwise.
Look for ways to be creative with how you do business – question every process that may have an impact on cash-flow.
Introduction
Some types of funding are faster to get than others, some require more security, some are cheaper, some come with strings attached. You need to know what type is going to be best for your situation.
It’s important to find funding that fits. You have a business to run. You don’t want your financial arrangements to get in the way. They should be a sail not an anchor.
Seven questions to ask yourself about getting business finance
Before you go knocking on doors, there are a few steps you can work through to help you pick the right type and quantity of funding:
1. What are you funding? Is it a startup? Are you buying a business? Or expanding an existing one? Are you looking to solve a cash flow problem? Some types of small business funding are better suited to different needs.
2. How much do you need and what will you spend it on? Knowing how much you need, when, and what you’ll spend it on will narrow down the best option for funding. Check out the next chapter on how much to borrow.
3. Are your finance needs short or long-term, or both? You may need short-term finance to get up and running, with longer-term finance to keep you afloat through the first couple of years. You can go to different places for each.
4. How risky is your business? A proven business idea might make attracting some types of funding easier. But there are options out there for innovative business concepts. Can you find out where your competitors get funding from?
5. What’s your history with business (or even personal) finance? An existing personal or business relationship with a lender or investor might make it easier to get money – as will a good track record in business and of paying back debts.
6. What will it cost? You can’t get finance without it costing you or giving something up. You’ll either pay interest to a lender, or turn over a share of profits to an investor. How will those costs add up over time?
7. Is it worth it? Once you’ve figured out the cost of the finance, make sure it’s worthwhile. Will the extra cash bring enough of an uplift in earnings or quality of life? In other words, what’s the return on investment (ROI)?
Some funding fishhooks
Some business financing options might not be available to you.
If you’re fresh off the blocks, traditional lenders might be reluctant to take a chance on you. They can’t see your past performance or judge your skill at running a business. And if you have no assets to put up as security, it will be difficult to get a large loan.
Equity funding isn’t an option for sole traders. If you want to sell shares, you’ll need to be a company (although you can sell an interest in a partnership).
Don’t give up though. There are a range of business funding options available, and being clear on your needs will help you find the right match.
What is Business Financing?
Tips to Raise Capital
Whether you plan to grow your market share, or an opportunity comes out of the blue, you don't want to miss out due to cash-flow restrictions. However, to respond quickly to fast-rising demand, you often need to raise money (called capital) quickly so that you can order more supplies and perhaps even fund new staff to respond.
The main decision when considering how to raise funds to grow your business, is whether to fund growth through debt or through equity.
Debt is money that you borrow against the business or against your own assets, while equity is where you sell part of your business to obtain the funds you need to expand.
Debt, when managed well, can work out to be cheaper than equity – you can never get your equity back. If you are growing a business and expect it to be successful, then equity may be more valuable as time goes on.
It's an important consideration for business owners. If you have reasonable business with reasonable debtors and reasonable assets, it may be wiser to use debt.
You may want to investigate managing your risk by securing the debt solely with business assets – a “non-recourse" debt.
It makes sense to get independent advice when you are considering these questions.
Always think creatively when you are looking to improve your business. Another consideration for growth, may be launching a joint venture. You may want to look for a company that's in a related area (but not directly competitive) and offer to share a percentage of revenue in a certain line of business in return for access to their customers. This strategy may save expenses or release the extra capital you need to grow.