NZ Cash Flow – The Importance of Working Capital
Cash Flow And Working Capital
Many people dream of owning and running their own business. A few do some market research to check if there is demand for what they want to do, before they begin their ventures, not many though. They jump in full of passion and enthusiasm. Even fewer forecast their cashflow. They get a few enquiries, make a few presentations and win a couple of sales. And they get even more excited about their future success. But then some bills start to arrive. They pay one or two and then realise there isn’t much cash in the bank. How can they pay the rent, the power or even themselves? But surely it’s OK because they’ve made those sales. The reality hits when they realise that as they gave their customers 30 days credit because that’s what everyone else in their industry does, they will not have any cash to pay their bills.
If they had undertaken some research at the beginning they would have found out offering credit is standard practice. Then they would have been able to make a cash flow forecast showing what they expect to receive and how much cash they will have to pay to suppliers. In short, they would be able to see how much cash they will need and when they will have to have it available in the bank; they would be assessing how much working capital they need to keep them in business.
Working capital performs many functions, not just enabling a business owner to pay their bills.
Without cash-flow or plentiful working capital to pay staff, suppliers and other bills, a business owner’s life becomes stressful.
It can help the business person get a good night’s sleep. No need to lie awake at night wondering how they will pay their short-term debts,
Working capital can keep friendships intact. No need to go asking friends and family for loans. That can be not only embarrassing to ask but embarrassing for the other party when they have to decline.
Freely available cash-flow also means that a business is not beholden to their bank. They do not have to undertake various covenants, reports and limitations to qualify for a bank overdraft or short-term loan. It avoids the dreaded phone call from the bank manager to go and discuss the finances.
Working capital means freedom and confidence for the business owner. Freedom from the constraints of banks or other lenders and confidence that your business is able to stand on its own feet, able to pay its way reducing the biggest cause of business failure.
But creating a free flow of working capital is not easy especially if your business offers credit to lots of customers. One easy way to generate more cash-flow is to use a financing service like single invoice discounting.
This sounds complicated but in fact is very easy. You simply decide how much cash you need, find an invoice that is about 20% more than that value and offer that to an invoice discounting service provider. They will buy the invoice from you, deposit the cash in your bank within about 24 hours and then collect the payments from the customer when it falls due.
To find more information about cash flow and working capital, go to this site, Fifo Capital.