From day-to-day cashflow bumps to growth finance, Conrad Ford explains the role of business finance as a cashflow management tool.

One of the key roles of finance directors and accountants is to understand exactly what’s happening with your company cashflow.

Whether they’re running reports monthly, weekly or even daily, it all comes down to the balancing of expenditure and accounts receivable, and giving maximum visibility of where you are.

We all know that working capital and cashflow are the lifeblood of the business – and it can be tricky to understand fully all your income, outgoings, bad debts and invoices owed. And we know there are times when those outgoings are greater than your income. 

When there are bills and salaries to be paid, but the money isn’t in the account, borrowing can be an effective cashflow tool. However, for many finance professionals, taking out a loan is often incorrectly seen as a sign of cashflow management failure. In reality, business finance is another cashflow management tool available to the finance manager looking to get a strategic injection of cash.

A change of perspective

We tend to think about cashflow management in terms of avoiding negatives – but it’s about achieving positives, too. The most effective cashflow management not only avoids missed payments, it also makes sure that you’ve got the maximum amount of cash available when you need it most.

For example, let’s say you’re a wholesaler and you receive a big order from a new customer. You’d want to purchase a large amount from your supplier to make sure that there’s enough stock available for the new customer, as well as existing business.

In this situation, the last thing you would want to do is turn down orders, or risk being out of stock. But equally, making a large stock purchase before you’ve been paid may not be possible. Overall, having the cash ready to spend is critical to making the most of these kinds of opportunities.

But what if there simply isn’t enough in the balance sheet to pay for a big order? Even with the most skilled finance director or accountant, if you’re growing too quickly, your cashflow might not keep up – and that’s where business finance comes in.

Cashflow and working capital finance

There is a wide selection on the market, and the first category can be thought of generally as cashflow products –including overdrafts, revolving credit facilities, business credit cards and even invoice finance.

What these products have in common is that they’re all designed to help you smooth out cashflow bumps and keep your working capital intact, even if an unexpected cost comes up.

For example, with a revolving credit facility set up, you know you’ve got a safety net in place and can fly a little closer to the sun on the day-to-day cashflow front. If the timings don’t quite work out, or if your forecast turns out to be inaccurate, you can dip into the overdraft-style funding line to cover the shortfall, even if it’s only for a few days. Many of these revolving credit products don’t charge interest unless you’ve drawn funds, which means that, aside from a modest setup cost, you only pay for what you use.

On the other hand, using invoice finance is more of a structural difference. With a factoring or discounting facility in place, your payment terms are effectively brought forward, maximising available cash levels at any given time. Because the gap between money out and money in is smaller, the chances of a cashflow shortfall are lower, too.

Project funding

So far, we’ve looked at funding day-to-day cashflow bumps in order to leave your working capital intact. On the other side of the coin is project-specific funding, where you use your regular revenues for the day-to-day, and use finance to fund a specific project.

The classic example of this is broadly termed ‘growth finance’, which might be an unsecured loan for setting up new premises. It could be anything, though – one of our customers recently used a revolving credit facility to purchase a new vehicle, which in turn allowed him to hire a new member of staff.

With project funding in place, you don’t need to bet all your chips on one customer – and sometimes, getting the right funding is what makes the deal happen. For example, businesses with both buyers and suppliers overseas can suffer from extremely long pay cycles, where they have to pay upfront for goods that take weeks to manufacture and ship, and then are invoiced on 30-day terms on delivery to the customer. This can mean payment gaps of three or four months for some businesses.

In such a situation, having a trade finance partner on board mitigates a lot of the cashflow risk –  not only are you not left out of pocket, you’ll also have an experienced team to help you to navigate regional regulations and cultural differences.

Tax bill funding

Tax bill funding is one more example of finance as a management tool. I know what you’re thinking: if you need a loan to pay a tax bill, something has gone wrong. But there are legitimate reasons that you might want to fund a tax bill rather than need to, and here’s why.

The best cashflow management maximises available cash when you need it, and even if you’ve been diligently putting cash aside for your tax bill, it will still take away a chunk of your working capital when you pay it. You may choose to fund the tax bill with a loan, in order to hang on to the extra cash for a little longer.

There can also be some tax benefits to using a loan to pay your tax bill – interest payments on a VAT loan are accounted for as operating costs, which can bring down gross profit and effectively reduce your corporation tax bill at the end of the year.

Final thoughts

Understanding cashflow is a fundamental part of business – you and your accountant should be aware of not just your current cash situation, but what the future holds. Being ready to take business finance when you need it most can be a powerful tool. Whichever finance product you choose, it’s all about managing your cashflow to equip your business with the maximum amount of cash, which you can put towards new projects and grow your business.

About the author

Conrad Ford is a chartered management accountant and the founder and chief executive of Funding Options, an online marketplace for business loans that is one of the three finance platforms designated by HM Treasury for the bank referral scheme. Conrad regularly appears in major national press and can be found on Twitter as @FinanceConrad.