From XU Magazine, 
Issue 21

Funding your business through uncertain times

How to avoid the cash flow pitfalls

A downturn in the economy can create a multitude of challenges for small businesses. When sales slump, income decreases and ready cash disappears from the kitty, it’s bad news for your working capital and your ability to trade and turn a profit. So, how do you fund your business in these uncertain times? Anil Stocker, CEO and co-founder of MarketInvoice, explains how to overcome this economic uncertainty through good cash flow management and a solid funding strategy…

Then economic times get tough, it can be a big challenge for SMEs. With a global economic slowdown affecting international trade, and the impact of Brexit affecting the long-term planning of UK companies, business owners and CEOs find themselves trading under a cloud of uncertainty.

The key to overcoming the precarious nature of the market is to understand which factors you have no control over – the economy, market forces, the political situation etc. – and to focus on those that you CAN change.

By getting a tight grip on your company’s financial management, and focusing on areas such as cash flow, spending and financing, your business can be better prepared to weather the economic storms and come out safely on the other side.

Uncertainty as the enemy of good planning

A robust business plan is critical to long-term success, giving you the foundations on which to build your trading strategy, growth and overall profitability. But when economic conditions are so unpredictable, planning can be extremely difficult.

The British Chambers of Commerce recently cut its forecast for GDP growth next year to just 1%1, down from 1.3%, and many UK industry sectors are showing signs of a slowdown. US economic growth fell to a 2.1% annual rate2 in the second quarter of 2019, highlighting that the future for small businesses, globally, is becoming highly uncertain.

Uncertainty is definitely the enemy of good planning and a business threat that’s very hard to predict and cater for. When the solid economic foundations you need as the bedrock of your planning are taken away, your strategy is left on very shaky ground.

The impact on cash flow and working capital

If the road ahead is looking difficult to plan for, having a rock-solid grip on your finances and cash management becomes even more critical than in more stable times.

For industries such as construction, manufacturing or heavy industry, cash flow sits on a knife-edge, even at the best of times. When overheads and operational costs are high, as a sector, keeping your cash flow in a positive position can be a real challenge. Any negative impact from economic factors, or downturns in sales and revenue, can easily tip a small business into the red – without enough working capital to continue trading.

To stay on top of cash flow and working capital, you need to get proactive. This means:

  • Having access to the best possible financial information – with detailed, real-time reporting of your cash position, you’re better equipped to understand your financial health, spot the big cash flow issues and take the necessary action.
  • Getting realistic with budgets and payment times – setting a realistic budget for each job, and then tracking spending against this allows you to measure performance and keep costs down. By making payment terms more clear, and chasing up late payments more effectively, you increase the flow of cash into your business.
  • A focus on spend management – any activity that reduces your cash outflows will have a positive effect on your cash flow, so getting proactive with spend management is essential. Examples include negotiating better rates with suppliers, sourcing cheaper materials and getting a tighter grip on expenses and operational costs.
  • Being smart with your use of forecasting – having a workable view of future income and cash flow acts like a crystal ball for your business. So making use of cash forecasts, sales projections and detailed scenario-planning will be invaluable to your cash position.

Having access to funding at the right time

By increasing your insight and control over your own internal finance function, you can go a long way to boosting your cash flow position and increasing working capital in the business. But for most SMEs, there will come a time where additional finance is required to fill a funding gap.

It can be daunting to find the right finance product for the job but the good news is that routes to funding are more varied and more plentiful than ever before. There’s an option for every business, from traditional lending products businesses are accustomed to getting from their bank to possibly less familiar fintech solutions that provide fast and innovative sources of funding.

Routes to funding can include:

  • Invoice finance – getting an advance against your outstanding invoices allows you to get that cash sooner, in some cases requesting and receiving funds on the same day. This makes invoice finance ideal for when there’s an unexpected cash flow gap, or your working capital is dropping to a point where you can’t trade effectively without a cash injection. The team at MarketInvoice have recently put together a short video that explains how invoice finance works in really easy-to-understand terms.
  • Bank overdrafts – if you have an existing relationship with your business banking provider, extending your bank overdraft is another way to extend your cash runway a little. With that overdraft in place, you have access to increased working capital and can continue trading, bringing much-needed revenue into the business .
  • Business loans – when a large lump sum is required, a business loan is a good option for accessing the finance you need. Some form of security will be needed for larger loans but unsecured loans are readily available if your business meets the criteria being offered by the lender.
  • Private investment and equity funding – if you’re ready for fast growth or scaling up, you’ll almost certainly need to look at attracting private investment. Taking money from private investors can raise a large sum of cash, but you must also factor in that you’re selling shares to these investors and will lose an element of control over the long-term future of your business as a result of this.

How Xero and MarketInvoice put you back in financial control

Planning out the future funding needs of your business is a critical component in maintaining a healthy financial position. Fortunately for Xero users, it’s very easy to drill down into your numbers and get the financial data, reporting and forecasting needed when applying for additional funding and finance products.

As a platform, Xero gives you the best possible way to record, track and forecast performance. And with an ever-growing ecosystem of fintech apps and funding solutions in the Xero App Marketplace, you have the financial control to overcome business uncertainty .

If you’re already a Xero user, you can add:

  • Cash flow forecasting – apps like Fluidly and Float are smart cash flow management tools that help you monitor your cash position on a day-to-day basis and create realistic forecasts of your future cash position.
  • Automated credit control – Xero’s own internal invoice-chasing features, paired with an automated credit control app like Chaser, make it easier to collect payments on time and increase the flow of cash into the business.
  • Business intelligence dashboards – KPI dashboard apps like Futrli and Fathom give you a one-stop shop for monitoring your cash, budgeting, sales and financing metrics.
  • Finance providers – funding providers like MarketInvoice can integrate with your core Xero accounts to access all the financial information needed when assessing a funding application, speeding up the process to get you the funds faster.

Even with the current unpredictable nature of the marketplace, with the right planning, forecasting and funding strategy, you can stay one step ahead of the game.

The future may be uncertain, but it needn’t be a barrier to your business success story.

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