The importance of CASH FLOW

Before you go looking for finance or investment to fund your business growth, it is critically important to first look at your cash flow model as you may find the money you need without giving up part of your company.

If you are spending money before you are collecting it from customers like most businesses are, either to fund wages for a service business or to fund a supply chain for a products business, your business is "cash negative". Your payment terms might be 7, 14 or 30 days+ which means for every transaction you make you need to fund that gap between when you incur the relevant costs and when you collect the money. The faster you grow your business and the more transactions you make, the more money you need to fund that growth.

So before you rush to the bank or look for investors, always consider how you can get your cash flow to a more "cash neutral" position. Can you negotiate better payment terms with your customers to get the cash in faster, maybe through a settlement discount (eg 2% discount if you pay in 7 days). There are also banks and finance institutions that do "Debtor Financing" where they will pay out your invoices owing in 7 days for a combination of an interest charge and service fee which can be a great solution in some cases, though your customers will need to be of a certain credit standing and spread out enough to lower the risk.

On the other side can you extend the time for payments to suppliers (payment terms) so it covers the time that stock is on the water (if importing) or in warehouses waiting for a buyer, or to be shipped to a retail outlet. Talk to your suppliers and re-enforce the importance of a workable partnership to grow the market and set account terms in place. Don't just accept that you have to pay on the bill of lading.

The aim is to get your business to be as cash neutral as possible so it is not costing you to grow your business. In some cases by taking deposits up front or staging payments you can even get to a point where your business is cash positive which means you are getting your money in before you are spending it. This means the faster you grow the more money you have in the bank!

So ALWAYS consider your cash flow model when designing a business or looking for finance or an investor, and see if you can work out a way to become more cash neutral or even cash positive. Why give away part of your business when maybe you don't need to!...

The aim in business is to get as "Cash Flow Neutral" as possible, or even "Cash Positive" to reduce the need for further cash investment to fund growth.