A down market can significantly impact an industry by influencing nearly every sector of the overall economy. What can your business do to protect itself and continue to develop and grow when the market isn't particularly strong? We’ve outlined some key concepts to help you manage cash flow more strategically.
Cash flow is critical to the success of any business. Cash flow is related to revenue and profit but is ultimately a distinct consideration. Cash flow represents the total amount of money brought in and sent out over a given period, often a quarter. Even extremely successful companies can suffer when a true understanding of how cash flow impacts operations is lacking. Issues typically arise and companies can go into debt when cash flow is managed poorly, opportunities are not acted upon, and unnecessary risks are taken.
Short-term spending required to keep a business afloat or needed to complete a significant amount of work can lead to a negative cash flow. A business can encounter these situations when spending exceeds earnings. Existing relationships, contracts and other agreements can represent a strong long-term financial base. However, unchecked or poorly planned spending can create major problems by leaving businesses unable to pay off short-term financial obligations. In turn, that opens the doors to more serious possibilities, like bankruptcy.
You can improve cash-flow management and reduce (or eliminate) problems associated with cash flow by increasing sales. You might also consider adjusting pricing to increase the number of transactions that can complete within a given period. Implementing time restrictions for the length of time customers must pay for goods and services can also help to solve cash-flow problems related to accounts receivable. Similarly, an enhanced effort to collect on existing accounts receivable items can also contribute to increased cash flow.
As a business owner, you must understand your current cash flow and regularly project what your cash-flow situation will be in the coming months. This strategy allows you to make informed and relevant decisions, whether it means a shift in business strategy, increased efforts to manage cash flow or the responsible use of credit to create a stronger balance.
Flexibility is critical when managing cash flow successfully, especially in a market that has taken a downturn. Businesses need to take reasonable steps to ensure they can handle fluctuations in the short term without seriously impacting operations. One strategy to consider is the use of a revolving line of credit. This concept utilizes the equity that already exists within your business and gives you an easily used tool to contend with short-term cash flow considerations, unexpected financial needs and other, similar considerations.
A revolving line of credit functions in the same way as a credit card as it extends your ability to pay for a variety of business needs, and only requires you to pay it back at specified times. Depending on the specific terms of the agreement, there are several options for scheduling payments around a schedule that fits the needs of your organization. A revolving line of credit is a major asset for businesses that regularly work with expensive machines and equipment and unexpected operational costs.
Partnering with a captive financing company to secure a revolving line of credit offers unique advantages. You can build upon an existing relationship to access your revolving line of credit and simplify your financial considerations by working with fewer outside groups overall. Options like skip payments, interest-free financing and automatic renewal may be available to make the line of credit less burdensome.
Managing cash flow can be complex, and a down market only makes it more complicated. However, by giving this vital business task the attention it needs and responsibly using tools like revolving lines of credit to address it, your business can prosper.