As a rule of thumb, it’s generally assumed that positive cash flow is a critical characteristic of successful small businesses. Theoretically, this is true. But as a team of self-confessed cashflow radicals, we’re all about the bigger picture. This means that as far as we’re concerned, cash flow issues can sometimes be sign of a successful SME. Yep, we’re going there.
So what’s prompted us to make this unorthodox claim? Well, when you consider a business as a multifaceted landscape as opposed to a singular locale, cashflow issues aren’t always a bad thing. On the contrary, they can often be a sign of success. To prove our point, here’s four scenarios where negative cash flow isn’t necessarily the devil in disguise…
Seasonal cashflow
While some SMEs enjoy year round stability, others are intrinsically defined by seasonal traffic. For example, if you run a wedding planning business it’s a given that the lead up to summer is going to be far busier than the months preceding winter. Why? Because most brides want to get hitched in the sunshine. Similarly, building and construction businesses will often boom from May to September, and cool off when harsh winter weather makes progress near impossible. As such, this means bank accounts spike during peak periods, and slump throughout off season. With a little strategic planning, this volatile cashflow pattern doesn’t have to be adverse. Preparation is the key to success, and is an absolute must for businesses wanting to protect their bottom lines during quieter times. Our advice? Put together a 13 week rolling cash flow projection that actively predicts potential areas of stress, and allows you to address issues before they hit.
Big new orders
Another common negative cashflow scenario is when a business receives a weighty new order. Before remuneration starts to roll in, meeting demand requires an initial outlay of labour, materials, overheads and other expenses. This can create a fiscal gap, which sees the business initially out of pocket, but on-track to make an overall profit.
New expenses
Building a SME from the ground up is no easy feat. Growth and expansion calls for significant investment, which means that revenue is often used to cover new expenses. From purchasing new equipment, upgrading machinery, leasing bigger office premises and hiring more staff, there are plenty of scenarios where positive growth expenses facilitate short term negative cashflow.
Long payment terms from big customers
Just because your cash flow is a little lacklustre, it doesn’t mean that your business is falling behind. Often, big customers demand long term payment plans, which means that financial incomings won’t always reflect the profitability of a business.
Other scenarios…
We’ve explored the above four scenarios in detail, but there are plenty of other situations where negative cashflow can stand as a signal of success. Take the latest figures from British Starbucks branches for example. In 2015, the global coffee deity turned a profit for the first time in 17 years. Its 791 stores made a collective pre-tax profit of £1.05 million, with managing director Mark Fox described the achievement as “an important milestone for the business” after the company lost £20.5 million in 2014. No one would class Starbucks as an unsuccessful company, yet they wouldn’t have expected it to not turn a profit in 17 years.
While interim cashflow difficulties aren’t necessarily a cause for concern, long term gaps are definitely something to address. If your business is encountering ongoing shortfall, why not reach out to our friendly team of GapCap experts? By shortening the time lag between issuing invoices and collecting payments, we help thousands of SMEs empower themselves with the short-term finance needed to drive growth