Cash flow management is a challenging balancing act that often requires extensive data. Here are five shortcuts for busy business owners to start without that data.
Cash flow is vital to the survival of any business, especially for any small to medium enterprise (SME).
Any business plan relies on having a granular level of data to analyse and understand where the usual peaks and troughs in your business cash flow are. Obtaining that data isn’t easy when you’re focused on reaching your next business goal, but you can work towards cash flow harmony by starting simple.
This may seem obvious but it’s worth mentioning. Reconcile your expenses on a regular basis, weekly if possible. Your accounting department will appreciate having updated numbers to use and it will make it easier to track how much your staff is spending. The more regularly your accounts are reconciled with expenses the clearer your understanding of your business finances will be.
Only consider payments that have cleared, with the money in your accounts, as having been paid. It’s a common mistake for SMEs to consider payments made simply because a deal has been made and payment agreed. Until the money is in your account it isn’t real and shouldn’t be considered as able to be spent.
Unfortunately, deals can fall through for a number of reasons, even after they’ve been agreed. Worse still you can deliver on a piece of work and never receive payment if you enter into a deal with an unscrupulous company or payment could be delayed near indefinitely. Until the money has been paid and the service rendered you should refrain from considering the money as spendable.
Cash flow is everything to SMEs. This isn’t a new concept, but unfortunately the businesses which make up 97.4% of all businesses in Australia have been left behind by the banks and other financial institutions. None of them are able to provide an adequate funding solution for SMBs, and they certainly do not provide funding that understands the intricacies of individual businesses.
However, government funded grants are available and should be considered. These grants should be considered carefully and only taken on if the terms are in alignment with your company’s goals and mission. Government funding often comes with many strings attached and is normally ring-fenced for specific uses. If those terms are a mismatch for your plans then you’re better off looking for capital elsewhere and avoiding any awkward issues of having to return the money or receiving negative publicity for not following through.
SMEs are saddled with excessive interest rates on loans and time limitations that don’t make sense for their dealflow. Many existing credit products for businesses are short term and come with so much interest that there’s a minimal profit margin in it for the business. But because these SMEs want to keep operating they’re forced to use these products and lenders have no motivation to provide more bespoke credit. It leaves SMEs with the same cash flow problems they’ve always had.
There are some smart credit products available which are able to build on lender-borrower relationships and provide better interest rates. Revolving credit facilities, lenders that supply businesses with a line of credit on a short term basis, are a common choice for relatively new SMEs that need quick capital and cheap credit.
Unfortunately, these options have their own drawbacks. There’s no guarantee that you’ll receive further credit even if you meet your obligations. The credit available can often be limited to smaller amounts than needed for big company growth moves and have limitations around the age of the SME applying that vary from lender to lender.
If you do receive approval for the revolving credit then you also need to keep an eye on the interest rate, in most cases it accrues daily and is collected weekly. It’s not a solution that will supply you with the capital to operate for long periods of time.
Open Banking has been hailed as a potential solution for the lack of customisable credit made available to SMEs. Unfortunately, Open Banking has not been an overnight success, for most financial businesses it’s an experiment, something kicked over to an innovation hub.
One day it might work for one of the big companies and if it does they hope it’ll make them a lot of money, but they’re not interested in fixing the problem that so many small businesses are facing right now. There’s no way that Open Banking is going to solve the issue in its entirety any time soon.
Application Programming Interfaces (APIs) are a much more reliable avenue for facilitating the funding of SMEs. An API sounds complicated but it’s not, it’s simply a way for a lender to communicate with the software you use that contains your business data. It means that you don’t need to analyse all your data for the lender, they can simply connect through an API and obtain the information they need to make an informed offer of credit.
An API connects your information to a lender so that they can understand your business needs without requiring you to fill in endless forms and waiting months for approval. They’re used all the time online, whenever you sign-in to a new website using your social media account you’re using an API. It’s possible because your social media account is sharing your relevant information with the new business with your permission.
Look to connect with lenders that are able to dig deep into your data through an easy to integrate API and provide funding that meets your needs. There are credit providers in the market that will operate on the terms that are best for your business.
If you follow these five steps then you will have positioned your business to be able to attain cash flow harmony. You’ll be able to quickly understand how much real debit you have to access in your accounts and with a bit of calculation you’ll have a strong idea of the amount of credit you’ll be able to access at any given time.
This is cash flow harmony as best as it can be using regular credit products and cash flow management. But it would be far better for your business if you were able to reconcile your expenditure at a macro level, planning for quarters and years rather than weeks and months.