Maintaining cash flow is an exhausting part of a small business CEO’s job. Consistent cash is elusive and stressful, with your business relying on the whims of the economy, vendors, customers, suppliers, employees and of course the bank. It’s a uniquely challenging time in business, with three trends in particular shaping the cash flow strategies of small business today.
Surviving Cash Management
Larger companies have sophisticated cash management operations that inherently work against small business. Their well-defined cash management strategies carefully balance cash collection and disbursement to reduce costs and maximize their own access to working capital – methodically improving their cash flow position at the expense of small business. When extended payment terms are institutionalized into your customers’ accounting operations, The Bank of Your Name Here essentially funds these firms. They actually don’t even need as much funding from their own bank because a large part of their working capital is made available by forcing small vendors to await payment.
Mourning the Death of Relationship Lending
Business deposits and reputation once added value to the loan application process, but today relationship lending is over. And while economic recovery is apparent in many industries, most major banks haven’t developed enough amnesia regarding previous losses to really go after the small business lending market. As a result, loans are being granted to only a very small percentage of business owners, typically only the ones that already have some cash on hand.
Competing in Real-Time
Small business works in real-time, all the time. To compete, you’ve got to be ready with operating resources right out of the gate – but that takes planning and cash management that many small firms are just not able to handle on a consistent basis. Distinguishing your firm with better, faster service may be impossible if there is not cash available to handle efficient operations that ensure you run in the most competitive way.
Finding Financial Control
These economic realities have significant impact on small business finance; together they simultaneously stifle traditional cash flow routes and enable alternative financing options like invoice factoring, which are becoming powerful tools for small businesses. Invoice or accounts receivable (A/R) factoring is a financial transaction where a business sells some or all of its accounts receivables (or invoices) at a discount to a factoring company (or factor), enabling the business to gain immediate access to its cash. The business is paid quickly and the factor takes on the role of the accounts receivable department – easing the administrative load, freeing the business to focus on the job itself and ensuring consistent availability of working capital.
Because factoring is capacity-related, sales are the only figures that matter. Funding is not influenced by the fiscal conditions hindering banks or the economic stresses driving your customers and suppliers. The factor is not concerned with debt coverage, liquidity ratios or other fiscal thresholds that would matter to a bank. And instead of acting as the bank for bigger customers, small business operators can rely on their own funds for business growth and expansion, creating a more positive situation for small business cash flow. This greater financial control means small businesses are no longer at the mercy of banks, big customers and suppliers. When accounting duties are handled by the factor, small business operators further reduce resources and see added value from the factoring process.
Working to Thrive
Small business has to become much savvier about funding options in order to survive and grow – remaining nimble, adapting to new realities and turning to real-world working capital models that safeguard steady cash flow.
Good business is not the same thing as good cash flow – and getting paid quickly makes a big difference between basic business survival and strategic business growth. By offloading accounting processes, balancing customers and vendors effectively, and sidestepping the ‘no thanks’ attitude from most major banks, small business is getting smarter and using options like factoring to gain a staying power advantage based on consistent working capital.
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This guest post is courtesy of Jeff Bell, senior vice president, eCapital.