When you run a business, the amount you are paid is important. But the timing of incoming cash is often even more important. It can be a key determinant of success. The reason is that cash flow — the timing of when you get paid and when you have to pay bills — can mean the difference between being able to pay employees and buy additional inventory, or not.
Regardless of the size of your business, cash flow can be managed to support growth. With a solid plan behind your inventory financing, you can accept terms from customers, pay suppliers on time, and efficiently manage business operations and capital needs.
The Importance of Cash Flow
Why does cash flow matter? Simply put, a business that appears successful can still fail if it has poor cash flow. This is because cash flow is how you meet daily obligations and fund future growth. At its base level, managing cash flow effectively means delaying payments as long as possible while collecting payments as quickly as possible.
Consider what happens when a business gets an opportunity and does not have a cash flow plan in place.
We’ll call this business Game-It because they make board games. When Game-It gets an order from a national retailer for 10,000 games, it needs to consider the implications of the opportunity. After all, there is a significant amount of revenue on the line, but the retailer terms are net 90 after delivery.
To meet the order terms, Game-It needs to acquire the parts, pay employees to assemble and package the games, and pay for delivery to the retailer. This process could take 30-60 days or more depending on suppliers.
If Game-It accepts the opportunity, delivers its product, and then runs out of money while waiting for payment, the company loses. If ownership realizes that while this is a great opportunity, the company is unable to pay for parts, labor, freight, etc. because of the payment terms and declines, the company also loses.
According to SCORE, a nonprofit mentoring network for small businesses, cash flow is one of the top reasons why businesses don’t succeed. Seasonal businesses face even greater difficulties in this area because they make most of their money during a compressed period of time, while paying expenses year round.
Measuring Cash Flow
The first step to improving cash flow is understanding the big picture. There are a variety of tools you can use, but the first step is to create a budget. This will help you understand your monthly income and expenses. You will also want to create a cash flow statement to better understand whether you have a positive or negative cash flow.
It is recommended to prepare cash flow projections for next year, next quarter and, if you’re struggling, even next week. An accurate cash flow projection can alert you to trouble well before it strikes. One important thing to note is cash flow projections are not a guarantee of the future.
Start by discovering the amount of customer payments, interest earnings, service fees, collections of bad debts, and other sources that are due, and when. Add the cash on hand at the beginning of the period to the cash due.
Next, detail amounts and dates of projected cash expenditures. Include all significant outlays, including rent, utilities, wages, salaries, inventory, sales and other taxes, benefits, equipment, professional fees, supplies, debt payments, marketing, vehicle and equipment maintenance, fuel, etc.
Ways to Improve Cash Flow
Once you have a picture of your situation, you should explore ways to improve your cash flow position.
These are a few of the most common practices for creating positive cash flow:
- Cover expenses with savings or a line of credit
- Reduce expenses
- Use creditor payment terms to your advantage
- Establish terms with suppliers
- Offer discounts to customers to incentivize early payments
- Factor invoices to get cash sooner
- Finance growth with inventory financing
Inventory financing is similar to a line of credit or term loan; however the funds are used specifically to purchase inventory or raw materials to produce the inventory. This option is a sound strategy for product businesses that are scaling rapidly, brands introducing new product lines or sales channels, or taking advantage of volume discounts.
Kickfurther offers an inventory financing solution where the manufacturing costs are sent directly to suppliers, and paid back as the inventory sells. This payment system aligns better with natural revenue cycles than it does the immediate repayments of many traditional and online loans offers. Funding inventory through Kickfurther prevents growing businesses from having to pinch cash on hand and choose between paying for additional inventory or investing in other growth initiatives such as marketing, equipment, and staff. With costs lower than factoring, PO financing, and many lenders, inventory funding with Kickfurther also has higher limits than most, meaning businesses can keep pace with demand.
Watch the recording of Forecasting Predictable Growth for Brands in Unpredictable Circumstances for a deep dive into how implementing a capital partner like Kickfurther can help you continue to scale through supply chain strains.