When we think about cash flow, we generally think about businesses that are struggling to make ends meet. Perhaps they’re not generating enough sales, or their overheads are becoming unmanageable, and finance is needed to paper over the cracks. However, it’s actually the case that lots of successful and profitable businesses have to deal with cash flow too. In this article, we’re going to take a look at why.
Why successful businesses need cash
Just as with all businesses, profitable ones will see cash as the lifeblood of operations. Without cash, businesses cannot pay their staff, their debts or any of their normal monthly overheads. It doesn’t matter what state a business is in; cash is always important, and when the flow of it becomes disrupted, for whatever reason, it can have significant negative impact.
In this article:
- Payment terms
- Debtors and late payers
- Cash flow affects growth
- Seasonal demand
- Assets and stock
1. Payment terms
Payment terms are one of the most controversial issues in a great many industries, and often strain relationships between partners, suppliers and customers. For many, 30 days is the standard, but 60 and even 90 day payment terms are becoming commonplace for some, and these can have a very significant impact on cash flow. If too many invoices become payable too far in the future, that can make cash difficult in the short term, for paying things that are due, such as wages, rent, and stock.
2. Debtors and late payers
Following on from difficult payment terms is of course those that pay late or not at all. At any given time in the UK, millions upon millions of pounds are owed to SMEs. All of this debt should in theory be cash in the bank of these small and medium businesses, who could be using it for all manner of things. As a result, even businesses that are very profitable on paper might actually be struggling with cash flow, because they’re owed a considerable amount of money. Invoice Finance is one of the solutions businesses will look to use in order to combat this.
3. Cash flow affects growth
This problem is one almost unique to businesses that are profitable. Naturally, any good business will always be looking for opportunities to develop, grow, and ultimately make more profit. However, opportunities aren’t always available. Flexibility and a readiness to take advantage of a situation when it appears are really important, and this does of course require cash. If a business has the cash to comfortably maintain operations and be profitable, that’s clearly a great thing, but there could still be an issue if it doesn’t have the cash to take the next step.
4. Seasonal demand
Profitability is something that can sometimes be considered over different time periods. While a business might post a profitable year, that doesn’t necessarily mean that they were profitable every single month or even quarter. Seasonal demand can have a very large effect on bottom lines, which does ultimately mean that good businesses might have months where cash is tight.
5. Assets and stock
Businesses can sometimes be very profitable indeed, but it’s not unheard of for mistakes to be made when it comes to purchasing stock and assets. If a business has lots of cash and invests it into physical items, there is sometimes the risk that they can go overboard and tie up too much cash. While the company may well be making money and have lots of assets, if they don’t have enough liquid cash, then they may face issues.