Dr Jane Hughes, Lecturer in Accountancy at The Open University Business Schools explains why...
Cash flow needs to be managed
To fund your growth you need cash. You need excess cash, spare cash, and a gap in understanding is knowing where your cash is coming from and then managing that flow of cash so that you do have excess cash. A real difficulty for small or medium sized enterprises, so micro businesses as well, is that they don’t have lots of cash lying around. They don’t have cash resources, so they need to look at their business model, look at where their cash is coming from and think about how they can speed up the receipt of that cash.
So typically businesses are making sales and then waiting for that cash to come in or they’ve got cash tied up in inventory stock that they’re going to sell, so they need to think about perhaps getting that cash in as quickly as possible. If you’ve got a business model which is based on offering a service that means that quite often you’re getting your cash in at the point of service. That’s an ideal position to be in, or you might be getting regular payments for the service that you provide. But if you’re selling products to customers you need to think about perhaps offering discounts to get money in, checking the credit worthiness of your customers so you’re going to be getting that cash in, and doing all that you can chasing them for payments so that the money is with your rather than with them.
Another alternative is to use something like online invoice trading which is a newer version of debt factoring where you could sell your invoices to someone else who would collect the money in and give you a percentage of that invoicing upfront so you’ve got the cash in. But really it’s thinking about your business model, how your cash flows arrive and getting it in as quickly as you can.