A company’s cash flow refers to the money it has available to operate. A business owner is responsible for such actions as paying his/her employees, buying office equipment and advertising the company, just to name a few on a very long list. Without a good working cash flow, businesses stand to encounter a great number of difficulties, not the least of which is the inability to attain any business loans from banks.
According to banks, a poor cash flow = no loan.
A poor cash flow is often listed as a top reason why business owners are denied their bank loans. A loan officer will take a look at a company’s cash flow to determine how well its owner is managing his/her earnings and expenses. Having a poor ability to handle money, most loan officers would agree, is a sign that being able to pay back a loan may be a problem.
“While your credit score shows your good financial habits, your business’s cash flow will reveal whether you can actually sustain a loan or not,” confirms Meredith Wood on AllBusiness.com, “If you regularly deal with late paying customers, long-term invoices, large purchases that took a long time to get recouped, and so on…then a lender might question whether you can really afford regular loan payments on top of everything else.”
On BizJournals.com, David Goldin concurs, listing a lack of consistent cash flow as the top reason banks won’t loan money to a small or medium-sized business. “Banks tend to favour SMBs that have a steady revenue stream and consistent cash flow coming in every month,” he writes, “SMBs that can’t demonstrate this consistency are denied loans significantly more often than not.”
What can you do to better your cash flow?
Firstly, it’s important to create a budget and be diligent about keeping on top of your numbers. This will involve planning a specific schedule for payment of salaries, taxes and other day-to-day expenses, says Jesse Torres on Entrepreneur.com. However, he also makes it clear that it’s important to stop being mister nice guy.
In other words, if you’re owed money, you need to be clear about the timeline within which that money is to be received. If you’re sitting and waiting on a number of invoices to be paid, it’s wise to contact customers with friendly inquiries about when you can expect payment. Don’t allow for late payments to be habitual.
“A key element of cash-flow management is controlling the timing of funds coming in and going out,” says Torres, “It may be customary, depending on the industry, for a business to extend credit to purchasers. For example, customers may be extended a 30-day period to furnish payment. Every time this type of transaction occurs, it places a strain on the business. While the buyer need not provide payment for 30 days, the company must continue to meet its financial obligations.”
According to Synergy Merchants, a poor cash flow = no problem!
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