Nearly every business, regardless of the size, has problems meeting their regular obligations at one time or another. Standard expenses like paying suppliers, meeting payroll obligations, lease payments for property, and debt payments must all be done on a regular basis. To meet these obligations, companies depend on their accounts to be paid in a timely manner, more specifically, they depend on cash flow.
Inadequate cash flow is often the cause of business failure; while your net profits may look fantastic, if the businesses’s accounts payable receipts are lagging behind, the net result is trouble. One must have an understanding of their net operating cash flow (NOCF) to keep their business growing, particularly if they plan on taking on additional debt.
Understanding the Numbers
Naturally if you have cash on hand, that is always a positive. However, if you are facing a number of expenditures, you could be in big trouble.
While your profit and loss statement may show a positive correlation when you add in your accounts receivable and inventory and deduct your accounts payable, if you have no cash flow coming in, you could be facing a dilemma, particularly if you are in need of financing to grow your business or to keep the doors open.
Let’s take a look at some of the problems insufficient cash flow can create:
- Operating cash inflow – If during your current month, your accounts receivable for the month is $10,000 but you know you will only receive $4,500 income, the $4,500 would be your operating cash inflow. Simply put, it is the amount of money you actually have in hand for the month.
- Operating cash outflows – This is the amount of money you need to spend on a monthly basis to keep the doors open. This is the amount you need to service your current debt, pay your utilities and rent, and pay employees. Supply payments are also typically included because the sooner you pay your suppliers, the better the likelihood you are going to be able to get better terms from them. For the purposes of this discussion, we’ll assume your anticipated outflows are $4,450.
- Net operating cash flow (NOCF) – This is the difference between what you actually took in ($4,500) and the amount you are sending out the door ($3,750). The net amount of cash you have to work with at this point is $50. This number is the net cash flow available to service any new debt, investments, etc. you may be considering.
Now let’s throw another term into the mix: net operating cash flow — double prime (NOCF”). This is the amount of money that will be available for you to deal with non-monthly or non-recurring expenses. These funds will allow you to borrow additional capital, invest in new equipment, hire new staff members, or do any other type of discretionary spending. However, it’s clear looking at the numbers above that you have insufficient net operating cash flow to make any new expenditures because you are using all your incoming cash to pay non-discretionary obligations.
Calculating NOCF” for Growth
One of the problems with insufficient cash flow is the need for your company to grow. Those who have little or no discretionary cash will have to find a method for determining what is necessary to increase their net operating cash flow — double prime to ensure they have additional capital. One way to change the equation is by reducing the cost of goods sold. This could mean getting better deals from suppliers, cutting down internal costs, or speeding up your collections — these are the only really tried and true methods of increasing NOCF”.
Clearly, from looking at these numbers, the turnover of your receivables is very slow with you getting only about 50 percent of your anticipated cash flow for the month. This could be problematic if you need to hire a new staff member, need to invest in a new piece of equipment, or run into an emergency situation that requires cash.
There are two problems with the numbers related above. The first is it makes an assumption that you’ll get the same percentage of your accounts receivable monthly. Second, it further assumes you will not have emergency expenditures that burn into the residual cash you have left on a monthly basis.
The two ways to avoid depleting this cash are (a) to bring in more revenue monthly through higher sales (which can lead to problems because higher sales could mean additional inventory) or (b) invoice factoring.
When Invoice Factoring Is the Answer
When you need to make sure you have cash on hand for the necessary expenses of your business, and an invoice from a supplier comes due, you need cash on hand to pay those expenses.
The best way to ensure this cash is available is to work with a company who understands your unique cash flow needs, can help you address those needs, and does so in a manner that does not drive your company further into debt. Invoice factoring could be the answer to your problems.
Developing an invoice factoring plan is simple when you work with a company like TIM Finance (TIM) because we know chasing down payments from customers, calculating fees for late payment, and constantly sending out reminder invoices is time-consuming. It takes away from the time you could be spending growing your business.
If you are one of the thousands of small- or medium-business owners who is losing out on new opportunities because you simply do not have enough ready cash flow, contact the team at TIM and let them help you customise a solution that works best for your needs. Don’t let slow cash slow your business down.