One of the truisms of business is that cash is king. Cash flow is the life-blood of business. It must flow freely in and not too quickly out if the business is to survive.
An in-bound cash-flow clot can lead to the business having a stroke. In these serious situations, financing can be a lifesaver, and owners need to be able to recognize when it is necessary.
Before going to others to borrow money, spend a little time analyzing the cause of your cash-flow issues. A loan or line of credit can help with some issues but not all of them. Causes of low cash include high current liabilities, too much inventory, high accounts receivable and offering too much customer credit. If the cause is high current liabilities, additional borrowing is unlikely to do anything more than put a bandage on a wound that needs stitches.
Similarly, obtaining outside financing is usually not a long-term solution for having too much inventory because excess inventory is caused by poor inventory control. A line of credit may help you pay the bills in the short term, but those unchanged inventory policies eventually will create another cash crunch.
Finally, having high accounts receivable and offering too much credit to your customers can be the cause of cash flow problems and may signal a need to evaluate and change your credit policies.
There are legitimate circumstances that warrant borrowing. Additional capital is helpful when revenues are certain but delayed and you need additional cash to buy time until you collect that revenue. However, if your cash is low because your sales are low, then you might have a marketing issue that has the symptoms of a cash flow issue.
Low sales can be caused by more than one thing, including too little demand for your product or service. If this is the case, obtaining a loan will not resolve your issue but only postpone it.
In addition, your higher debt burden will only exacerbate your cash flow issues later. Low sales also can be caused by not having enough inventory. In this instance, financing could be a solution because it would allow for the purchase of additional inventory and the resulting increase in sales.
While there are many good reasons to borrow money for a business, such as purchasing real estate, expanding operations and purchasing equipment, alleviating cash-flow problems is not always one of them. You should find the cause of the problem and determine that additional capital actually would address the issue.
Determining the cause of cash-flow problems does not have to be painful. Look for trends in the key areas where cash-flow issues often arise, such as inventory, accounts receivable and accounts payable.
Ultimately, borrowed funds should be used to affect one of the key areas (and the cause of the problem). Anything short of addressing the cause of the problem is only postponing the problem until later and putting your business on life-support.
SBDC consultants can assist you with analyzing cash-flow issues, identifying their causes and when financing is appropriate, selecting the right type. For more information on how to contact your local SBDC office, go to www.georgiasbdc.org.