Is Cash Flow Killing Your Business?

Three Cash Crunch Realities and How to Deal

For a majority of small businesses, maintaining cash flow is an exhausting part of the job. Consistent cash is elusive and stressful, relying on the whims of the economy, vendors, customers, suppliers, employees and of course the bank. Today the working capital merry-go-round is more up and down than ever, further complicated by the steady departure of traditional lending and credit resources since the financial crash of 2008. Three trends in particular shape the cash flow strategies of small business today. It’s a good idea to evaluate the success of your cash flow efforts – and make necessary adjustments to achieve financial control of your business.

Surviving Cash Management, or Thriving with a Cash Flow Plan?

Larger companies have sophisticated cash management operations that inherently work against small business – their well-defined cash management strategy carefully balances the collection and disbursement of cash to reduce costs and maximize their own access to working capital. Yet the process of methodically improving their cash flow position can string out smaller vendors for 60-90+ day payment terms. When extended payment terms are institutionalized into your customers’ accounting operations, The Bank of Your Name Here essentially funds these firms. They actually don’t need as much funding from their own bank because a large part of their working capital is made available by forcing small vendors to await payment. By using your money to pay for growth, the large end customer enjoys strong cash flow security and competitive advantage.

Seeding New Financing Options, or Still Trying to Build Big Bank Relationships?

Business deposits and reputation once added value to the loan application process, but today relationship lending is over. And while economic recovery is apparent in many industries, most major banks haven’t developed enough amnesia regarding previous losses to really go after the small business lending market. Their low level of risk tolerance is a long-term problem for small business, and it means continued avoidance of small loans and deals. As a result, loans are being granted to only a very small percentage of business owners, typically only the ones that already have some cash on hand.

Are You Prepared to Compete, or Does New Business Send You Scrambling?

Small business works in real-time, all the time. Suppliers and customers want completed work and products fast, placing performance demands on their vendors and creating an extremely competitive landscape. To compete, you’ve got to be ready right out of the gate – but that takes planning and cash management that many small firms are just not able to handle on a consistent basis. Distinguishing your firm with better, faster service may be impossible if there is not cash available to handle efficient operations that ensure you run in the most competitive way. Expect real-time cash flow needs to increase in step with new customers or projects, or even fast-turn orders that create a positive spike in business.

Finding Financial Control

These are just some of the economic realities that have significant impact on business finance; together they simultaneously stifle traditional cash flow routes and enable alternative financing options like invoice factoring, which are becoming powerful tools for small businesses. Invoice or accounts receivable (A/R) factoring is a financial transaction where a business sells some or all of its accounts receivables (or invoices) at a discount to a factoring company (or factor), enabling the business to gain immediate access to its cash. The business is paid quickly and the factor takes on the role of the accounts receivable department – easing the administrative load, freeing the business to focus on the job itself and ensuring consistent availability of working capital.

Because factoring is capacity-related, sales are the only figures that matter. Funding is not influenced by the fiscal conditions hindering banks or the economic stresses driving your customers and suppliers. The factor is unconcerned with debt coverage, liquidity ratios or other fiscal thresholds that would matter to a bank. And instead of acting as the bank for bigger customers, small business operators can rely on their own funds for business growth and expansion, creating a more positive situation for small business cash flow. This greater financial control means small businesses are no longer at the mercy of banks, big customers and suppliers. When accounting duties are handled by the factor, small business operators further reduce resources and see added value from the factoring process.

Working to Thrive

Small business has to become much savvier about funding options in order to survive and grow – remaining nimble, adapting to new realities and turning to real-world working capital models that safeguard steady cash flow. A decade ago, struggling businesses factored to stay afloat during the recession but today it’s become a commonplace process, even offering greater competitive value to an end customer who does not have to borrow money in turn to pay an invoice earlier.

Good business is not the same thing as good cash flow – and getting paid quickly makes a big difference between basic business survival and strategic business growth. By offloading accounting processes, balancing customers and vendors effectively, and sidestepping the ‘no thanks’ attitude from most major banks, small business is getting smarter and using options like factoring to gain a staying power advantage based on consistent working capital.

About the author

Tracy Groves, vice president of marketing, eCapital -


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