Cash Flow. We hear and use the generic term, but as it applies to business financing, we need to drill down further. There are three main needs for a business to consider, as well as a corresponding type of financing to match each specific need.
Operations
These are your daily, weekly, and quarterly needs of your business. Accounts receivable take time to collect; there may be inventory used to produce sales; suppliers provide payment terms; payroll taxes are due quarterly; and so on. Is there a match between the credit terms you provide, and the terms provided to your business? If not, a cash flow gap exists. An examination of collection practices, sales cycle, and lines of credit may be helpful in taking a closer look at operating cash flow needs.
Capital Expenditures/Fixed Assets
Items such as machinery and equipment, and perhaps vehicles, are multi-year investments used to produce or sustain revenues. These items can be costly and matching their useful life to cash flow is essential.
Let’s say you are looking at a $250,000 machinery purchase. The machinery lasts five years and will enable your business to take on new business as a result. Your calculations show an additional $1,000,000 in revenues that will result in bottom-line profits of $100,000 per year. Your review of your cash on hand, combined with your cash flow generation, will help determine your ability to purchase the machinery or whether financing will be the better utilization of cash.
Our team of experts are equipped to help new and existing entrepreneurs navigate the financial complexities of running a business. Find out more about our commercial lending opportunities through Community First Bank.
Financing
What are payment requirements for capital used to finance business assets? Are there loan payments due or return requirements for investment equity?
Payment requirements for debt and dividends or distributions to owners reduce cash flow availability. For example, your bottom line shows $100,000 in profit. However, after examining debt principal payment requirements of $50,000, and because you are an LLC, you personally need to take a distribution of $30,000 for income taxes. The $20,000 remaining is not the $100,000 that it appeared to be.
Understanding your business needs and timing, then matching the appropriate sources of financing, is critical in financial management. Should you have questions regarding a strategy to address your cash flow needs, please call us to discuss further.
