Cash flow issues are common enough among small businesses. This is the reason why invoice factoring is one of the most common avenues a small business can take to get through the tough early days. When overall profits might just about meet expenses, but the timing of income leads to cash flow issues; or the funds are not there to cover expenses as and when these come in. A factoring service pays the invoice before the client does, and when the client pays, the company pays back the factoring service.
Above all, invoice factoring is a service to ameliorate cash flow issues. But what are these cash flow issues, more specifically? While the general definition is the lack of funds to cover expenses when the expenses are due, this manifests in different ways.
Accordingly, there are several different “cash flow issues” that can affect a business. Thales Financial, an invoice factoring for small business service, note that there is a real diversity of cash flow issues their clients normally present.
When To Use a Factoring Service
Before getting on to the different cash flow issues a small business might suffer from, it’s wise to know when using a factoring service is a good idea and when it is not. Paying back isn’t so much the issue as the loan can only be granted with the presentation of a company invoice as security, but rather the danger is when a company comes to rely on invoice factoring indefinitely.
Covering cash flow issues should be something that promotes company growth and allows profits to steadily increase. If a factoring service is only being used to indefinitely stay afloat with no growth, then something is wrong.
Most Common Cash Flow Issues
So, what are these cash flow issues that a small company can face? Cash flow is, in one sense, always the same problem, but it can be caused by a diversity of reasons. Here are a few:
Underestimating Start-Up Costs
The thing about start-up costs is you need to be able to cover them without having seen a penny of profit. That’s why they happen at the start of company’s journey. Essentially, it is a combination of poor expense estimates coupled with an insufficient budget or cash reserve.
If this happens to you, it might feel a little like starting on completely the wrong foot, but it’s common enough. Often, the costs of business are not apparent until you start doing business.
Erroneous Profit Estimates
Or, in other words, expecting profitability to come along before it realistically can. Say you commit to certain expenses in the future and expect to have, by that point, garnered the company profitability in order to meet them. Then the time comes, and profits have not sufficiently increased. The result is a cash flow problem.
Not Creating a Cash Flow Budget
Cash flow budgets are time sensitive. Ensuring sufficient profitability to meet expenses is only half the battle. After that you need to ensure profitability when the expenses come along. This needs to be factored into a cash flow budget. The alternative is a cash flow problem.
Not Collecting Receivables on Time
As a business, you have the right to ensure that you are paid on time. Allowing late payments may sometimes be necessary (as well as professional courtesy for trusted clients), but because timing is essential to cash flow, it could cause cash flow problems.
Such are the most common cash flow problems for small businesses. You should always aim to use factoring temporarily and put measures in place to ensure a healthy cash flow in future.