Financing Tools for Cash Flow Management

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It’s often said that “if cash is king, cash flow is queen.” That concept is based on the idea that really, the queen that makes things happen. When it comes to business success, cash flow does win over a lump sum of capital.

If you have trouble managing your business’s cash flow, you could be in for a rough time. Although it’s not always as simple as, “positive cash flow = good, negative cash flow = bad,” you should pay close attention to where your business’s cash flow sits. Some businesses can sustain negative cash flow for short periods, but an extended negative cash flow can sink a business faster than an iceberg.

The first step in managing cash flow is measuring cash flow. There are typically three types of cash flow: operating, financing, and investing. Teasing out each in a separate cash flow chart will give you the ability to identify opportunities more accurately and to shore up inputs and outputs.

Operating cash flow refers to the money that comes in and is directed to your recurring expenses like payroll and utilities. Financing cash flow is the money that comes in and pays existing debt (loans, credit fees and interest) and that either builds equity in financed assets or is paid out in dividends to stakeholders who bought in to the business. Finally, investing cash flow is the money that comes in that you add to your capital investments and fixed assets budget. Investing cash flow can be paid to purchase assets outright, or it can become a down payment on loans that become part of your financing cash flow. There are many cash flow analysis templates online to make the task of measuring and evaluating these components of cash flow easier.

In this article, we’ll go over how to use financing tools used to manage cash flow. Remember, cash flow isn’t the same as profit. The cash that comes into your business from sales is paid out as expense, payroll, capital acquisition and profit. The goal is to have more coming in than going out, so you can cover expenses and stay in business. With the help of some creative solutions and the advice of a reliable broker, you can take control of your cash flow before negative cash flow shifts from a blip to an emergency.

Borrow Smart

Suppose you’ve done your analysis and found that you have negative cash flow. How do you fix it? The simple answer is, of course, to get more money. But you don’t want to go out and pick up just any old loan. Getting a high-interest, short-term loan isn’t the best choice if you don’t anticipate having the short-term income to pay it off in time. Conversely, you won’t want to pay interest for 10 years on financing to cover your short-term utility costs.

The amortization period of your loan has a lot to do with the impact your loan has on your cash flow. The longer your amortization period, the smaller your monthly loan payments will be. Say you need to borrow $200,000 for a commercial mortgage. Your loan has a 30-year amortization period at 5% interest. The monthly payment works out to $1,073.64. With a shorter amortization period, say 20 years at the same 5% interest, you’ll pay $1,319.91 per month.

The goal here is to leverage financial tools that help you manage your costs, not to burden yourself with more expenses. So, when you find out where you can cut costs and raise profits, you’ll be ready to find a product that helps you fill in the gap. Both your initial cash flow analysis and finding the perfect financial tool are made easier when you consult a broker. Brokers help businesses like yours manage expenses every day and can offer creative solutions you may not have known about before.

Refinance to Reduce Monthly Payments

When you’re performing your cash flow analysis, the money you spend on financing should be one of the figures on your sheet. One way to improve your cash flow is to reduce what you’re paying for that financing every month. Lowering your interest rates by refinancing your loans is one useful way to tackle your cash outflow. Refinancing lets you replace an old loan with a new one that has better terms. You can also restructure a loan, which allows you to change the terms of a loan you already have. Interest-only loans like bridge and hard money loans give you the capital you need for the short term. You avoid paying the principal until the loan term ends, by which time you’ve boosted your incoming cash.

Use Cash Flow Products

If you’ve optimized your loans and reduced your expenses, but your cash flow is still being squeezed, you can tap into cash flow products to get relief. It’s common for some types of businesses to see cash flow reduced to a dribble in the off-season. If you’re working in the retail, recreational, or even political realms, you’re probably familiar with this problem.

Using cash flow products like a line of credit lets you manage your cash flow proactively. You can borrow when revenues are lean and pay back when they return. This helps avoid late fees that can stack up quickly. A business line of credit won’t charge interest if you have a zero balance on the account. That means you can keep a line open for emergencies and avoid having to wait weeks for a loan approval when your needs are urgent.

Accelerate Cash Flow

Sometimes you’re waiting on cash that’s owed you, but not due to be paid. This is often the case when you have outstanding accounts receivable due to generous repayment schedules. Once you’ve delivered your product, you wait 30, 60, or even 90 days to be paid. Meanwhile, the power company and your staff aren’t going to happily wait around to be paid. To accelerate your cash flow, you can sell your AR and get that cash now. The company that buys your AR gets paid back by your clients, so you don’t have to send more money out the door. You can sell invoices, contracts, and purchase orders through a process called factoring. Most factoring companies charge less than 5% in fees per account. Factoring is also known as contract financing or AR financing.

Taking The Next Step

Financing is not a replacement for cash flow, it’s simply a tool for managing it. Ultimately, you’ll need to address the issues causing negative cash flow in the first place such as product mix, sales capacity, sales skill, and cost of goods. That might include finding lower-cost vendors for supplies and materials, cutting unnecessary expenses, updating products and services, and incentivizing fast-paying customers.

When it comes to finding the right financial resources and industry insights, our loan brokers are a wealth of valuable information. Reach out to get expert advice tailored to your business scenario. +





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