What is cash flow and why is it important to my business?Cash flow as a generic term may be used differently depending on context, and certain cash flow definitions may be adapted by analysts and accountants for their own use. For our purposes, cash flow is an accounting term that refers to the amounts of cash being received and spent by a business during a defined period of time or sometimes tied to a specific project. Cash flow basically means "Do I have enough cash in my bank account to cover my expenses?”
Cash flow is king no matter what you do; it is the lifeblood of any business. Hopefully you’re convinced of the importance of watching your cash flow - but how do you keep it healthy? Make sure that your cash flow doesn’t depend on certain invoices being paid on time. An accurate cash flow projection can alert you to trouble well before it strikes.
Watching your cash flowThis is especially important in the early days of your business. If you know you can stay afloat when things aren’t going well, then you know you’ll be celebrating if the best-case scenario happens. When planning the short or long-term funding requirements of a business, it is more important to forecast the likely cash requirements than to project profitability, etc. Bear in mind that more businesses fail for lack of cash flow than for want of profit.
Why should I consider opening a factoring line to improve cash flow?Let’s be honest, factoring should not always be your first choice to improve cash flow. If you can get your customers to pay on time, early or even COD that is the ultimate solution. Besides getting customers to pay on time, you may also want to consider getting a bank line of credit. Bank lines of credit are typically less expensive than a factoring line, but don’t offer all of the additional features that a factoring company can provide. Banks want to get their payments on time, but don’t assist you in any way in operating your business more effectively.
Good factoring companies should be reviewing your accounts receivable on regular basis. You will be notified when invoice are going unpaid or when your accounts receivable aging is starting to look bad. Many factoring companies will even make calls to confirm your invoices and verify that the payables department of your customer has received the invoice and plans to pay it on time. When you consider these benefits compared with the cost of hiring a receivables clerk, the cost of factoring doesn’t look so bad.
Business invoice factoring can be especially effective when used in conjunction with a bank line. Some factoring companies can work with your bank to give you the best of both worlds. Your business can have the low over all cost of bank financing AND the flexible cash flow of a business factoring line.
In conclusion, you should realize that many profitable businesses go bust due to poor cash flow management. Having a factoring line may be just what the doctor ordered.
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