January 18, 2022

Financing Cash Flow Peaks and Valleys

Many businesses find financing cash flow difficult.

Sales go up and then they fall. Margins are high, but then they drop. Cash flow can fluctuate like an EKG graph from a heart attack.

How can you finance cash flow for these types businesses?

You must first know your monthly fixed expenses and be able to manage them. No matter what happens in the year, it is important to know how much money you will need to cover the recurring and planned operating costs. This will give you a base for cash flow decisions.

Second, calculate the cash available to the owners, outside capital, and any other sources of funding currently in place.

Third, plan your cash flow to ensure that fixed costs, accounts payable, and accounts receivable can be realistically incorporated into future weeks and months. Cash is often tight so make sure to do your cash flow weekly. It is impossible to predict how much volatility will occur in a given month if you only project your cash flow monthly.

You now have the basis for assessing your cash flow financing.

Each business’s financing cash flow will be different due to its industry, sector and business model. It also depends on the stage of the business, company size, owner resources, etc.

Every business should evaluate its cash flow sources, including owner investment, trade financing, payable financing, government financing, government remittances and receivable discounts to early payment.

Now you know what your options are for financing cash flow within your business model.

What now?

You are now in a position where you can entertain future sales opportunities that will fit within your cash flow.

Before we move on, let’s clarify three points.

First, financing does not mean that you need to borrow money from someone to cover your cash flow. It is a way to keep your cash flow positive and at the lowest cost.

The second is to only market and sell products that you can cashflow. The ROI of a marketing campaign will be measured by marketers. If the business can’t be cash flowed to close the sale and collect the proceeds then there is no ROI. You can’t finance transactions if your business has fluctuating margins and sales.

Marketing must focus on customers you can sell to repeatedly in order to maximize marketing effectiveness and decrease the volatility of the annual sales cycle.

Marketing is based on the assumption that if the customer wants it, the money side will follow. This is true in many cases. However, in businesses with fluctuating margins and sales, financing cash flow is a key criteria.

A more robust marketing plan, which better aligns with customer needs and financial limitations of the business, can help any business smoothen out its valleys over time.

Expanding your financing sources is the next best thing to do.

These are some strategies that can help you increase your cash flow financing sources.

Strategy #1: Establish strategic relationships with key suppliers who can extend more financing in certain circumstances to capitalize on sales opportunities. This can be achieved with larger suppliers who 1) have the financial resources to finance your business, 2) value your business and 3) have confidence that the business will forecast and manage its cash flow.

Strategy #2: Ensure that your financial statements are able to show a profit sufficient to repay debt financing. Accounting firms may be able to save you income tax dollars but they can also reduce your business profitability to the point that it is not possible to borrow money.

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