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 heart attack.
So how do you go about financing cash flow for these types of businesses?
First,
you need to accurately know and manage your monthly fixed costs.
Regardless of what happens during the year, you need to be on top of
what amount of funds will be required to cover off the recurring and
scheduled operating costs that will occur whether you make a sale or
not. Doing this monthly for a full twelve month 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, owners outside
capital that could be invested in the business, and other outside
sources 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
always 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 always going to be somewhat unique to each business due to
industry, sector, business model, stage of business, business size,
owner resources, and so on.
Each business must self assess its
sources of financing cash flow, including but not limited to owner
investment, trade or payable financing, government remittances,
receivable discounts for early payment, deposits on sale, third party
financing (line of credit, term loan, factoring, purchase order
financing, inventory financing, asset based 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 specific business model.
Now what?
Now you are in a position to entertain future sales opportunities that fit into your cash flow.
Three points to clarify before we go further.
First,
financing is not strictly about getting a loan from someone when your
cash flow needs more money. Its a process of keeping your cash flow
continuously positive at the lowest possible cost.
Second, you
should only market and sell what you can cash flow. Marketers will
measure the ROI of a marketing initiative. But if you can't cash flow
the business to complete the sale and collect the proceeds, there is no
ROI to measure. If you have a business with fluctuating sales and
margins, you can only enter into transactions that you can finance.
Third,
marketing needs to focus on customers that you can sell to over and
over again in order to maximize your marketing efforts and reduce the
unpredictability of the annual sales cycle through regular repeat orders
and sales.
Marketing works under the premise that if you are
providing what the customer wants that the money side of the equation
will take care of itself. In many businesses this indeed proves to be
true. But in a business with fluctuating sales and margins, financing
cash flow has to be another criteria built into sales and marketing
activities.
Overtime, virtually any business has the potential to
smooth out the peaks and valleys through a more robust marketing plan
that better lines up with customer needs and the business's financing
limitations or parameters.
In addition to linking financing cash
flow more closely to marketing and sales, the next most impactful action
you can take is expanding your sources of financing.
Here are some potential strategies for expanding your sources for financing cash flow.
Strategy
# 1: Develop strategic relationships with key suppliers that have the
ability to extend greater financing in certain situations to take
advantage of sales opportunities. This is accomplished with larger
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 statements 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 through tax planning, they may also effectively
destroying your ability to borrow money.
Strategy # 3: If
possible, only transact with credit worthy customers. Credit worthy
customers allow both the business and potential lenders to finance
receivables which can increase the amount of external financing
available to you.
Strategy # 4: Develop a liquidation pathway for
your tangible assets. Equipment and inventory are easier to finance if
lenders clearly understand how to liquidate the assets in the event of
default. In some cases, businesses can get resale option agreements on
certain equipment or inventory from prospective buyers assignable to a
lender to be used as recourse against a lending facility for financing
cash flow.
Strategy # 5: Joint venture a sales opportunity with
another business to share the risk of a large sales opportunity that may
be too risky for you to take on yourself.
Summary
The
primary long term objective of a business with fluctuating cash flow and
margins is to smooth out the peaks and valleys and create a scalable
business with more of a predictable sales cycle.
This is best achieved with an approach that including the following steps.
Step
#1. Micro Manage your fixed costs and cash flow and accurately project
out the cash flow requirements of the business on a weekly 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 transact with credit worthy customers to reduce risk and increase financing options.
Step #5. Work towards expanding both your financing sources and available source limits for financing cash flow.
Business
cycle stability and cash flow predictability is an evolutionary step
for every business. The industries with longer sales cycles will tend to
be the more difficult to tame due to a larger number of variables to
manage.
A continuous focus on the process for improvement outlined will help create the desired results over time