Adrian Goodman.
Cash is king for organisations of all sizes. Financial consultant Adrian Goodman looks at how SMEs in particular can manage their money and keep the wolf from the door.
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IN LARGE blue chip organisations, where cash and borrowings are more readily available, the focus is more on profit than cash. For SMEs, effective cash management is vital for both survival and growth.
Of course profitability is also important but even a profitable business can face difficulties if it runs out of cash. Cash flow – the movement of money in and out of the business – keeps operations running, employees paid and growth opportunities within reach.
You may have heard it said that “cash flow is the lifeblood of a business”. Without enough cash available, you cannot pay bills or other obligations as they fall due and you cannot take advantage of growth opportunities. Many SMEs face the issue of ‘profit without cash,’ where they appear profitable on paper but struggle to meet financial obligations due to delayed customer payments.
Managing cash flow effectively allows SMEs to anticipate shortfalls, plan for challenging periods, and build reserves. By carefully monitoring cash inflows and outflows, business owners reduce the need for costly, last-minute borrowing, which can be unsustainable.
Despite this, sometimes borrowing becomes necessary – or even advantageous in certain circumstances – so an understanding of the options available can be helpful.
Overdrafts
An overdraft allows businesses to withdraw more than is available in their bank account up to an agreed limit. It is a convenient way to cover short-term cash flow gaps and interest is only charged on the amount borrowed.
However, overdraft limits are often modest and exceeding them can incur significant fees.
Business loans
Business loans provide a lump sum that is repaid over a fixed period. They are generally used for larger, planned investments rather than day-to-day cash flow needs.
However, securing a business loan, especially in recent times, often requires a personal guarantee, which means your personal assets could be at risk if the loan cannot be repaid.
The fixed repayments can also put pressure on cash flow during quieter months.
Revenue-based funding
Revenue-based funding from companies like Outfund and Clearco offers a more flexible borrowing option. Instead of fixed monthly repayments, these lenders take a percentage of your future revenue.
This means repayments are higher during busy periods and lower when revenue slows down, which is particularly useful for businesses with fluctuating income. However, this flexibility can come at a higher long-term cost.
Invoice discounting
Invoice discounting allows businesses to borrow against unpaid invoices, giving immediate access to cash without waiting for customers to pay. The lender advances a percentage of the invoice’s value – usually around80-90% – and the balance (minus fees) is released once the invoice is paid.
This option unlocks cash tied up in receivables and is ideal for businesses with long payment cycles. However, the associated fees can add up, especially if used frequently.
For SMEs, cash flow management is about balancing the timing of money coming in and going out.
By using a combination of financial planning and appropriate borrowing options, SMEs can ease the pressure of day-to-day operations. Whether it is an overdraft for short-term needs, a business loan for larger investments,revenue-based funding for variable income, or invoice discounting to free up cash from receivables, there is a solution for every situation.
By understanding and planning effectively, you can maintain a healthy cash flow and secure the future success of your business.
Adrian Goodman is managing director of PPX Consulting and author of the book Achieving Profitable Growth, available on Amazon.
01536 85674
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