The Small Business Cash Flow Problem

 

 

It is often said that "cash flow is the mother's milk of small business."

 

One of the great benefits of being a citizen of the US is the relative ease of starting a new business, which is the dream of many Americans. Despite the enormous commitment of time and effort required, the limited and daunting probability of ultimate success, millions take the plunge every year. Everyone wants to be the next Steve Jobs, Bill Gates, Elon Musk, etc.

 

The point of this article is that capital is not only required to start a new business, but it usually increases over time depending on a few factors, which vary by industry. Often, new, hopeful entrepreneurs borrow from family and friends to obtain startup capital but not only tend to underestimate the initial capital requirement but also soon develop new, unexpected cash flow problems. 

 

Classical economic theory teaches us that all economic systems, such as small businesses require and utilize three (3) inputs, to one degree or another, to obtain one (1) output. The inputs are capital, land, and labor. The inputs have costs, which are interest, rent, and wages, respectively. Most U.S. small businesses are in service businesses rather than manufacturing because of  the capital required for entry is  astronomical, which is why services businesses are the most popular. 

 

Cash flow is not directly related to profitability. It's measured by the difference between and the timing of outgoing and incoming cash. Small service businesses perform their services for their customers to obtain incoming cash, which is known in accounting as "revenue."

 

The two (2) reasons that small businesses develop cash flow problems are sales growth and slow or delayed customer invoice payments. All medium and large businesses require "dating," or invoice payment terms, which is truly a disguised, interest-free loan from vendors even though small businesses don't think of it that way. They think of it as a commercial norm; a requirement to do business with the customer which is a larger business of government entity, which is probably true.  

The Cash Flow Solution

 

There are few solutions for small business cash flow problems. They mainly consist of the following:

    1. Borrowing more money from family and friends.
    2. Convincing customers to pay your invoices faster.
    3. Obtaining conventional bank financing.
    4. Factoring you invoices.

 

In most cases, choices 1-3 aren't possible. Family and friends will ask "since you haven't repaid my initial loan yet, what assurance do I have that you'll repay this new loan"? Your customers will say that there invoice payment terms cannot be changed. Banks will require two (2) years tax returns and financial statements showing not only that your business has the net worth to repay the loan, but that it has the profitability and cash flow to do so. But you need the loan because you have negative cash flow.

 

Invoice factoring, the fourth choice is the most likely and the choice upon which most small businesses rely. It's a great solution if your customers pay in a relatively timely manner and your invoices don't become problematic.

 

Also, not all factoring companies operate in the same manner. There are big differences. Please check out the links on this website, including the menu items at the top and bottom of each page to learn more about how we have made it so simple to factor your invoices, solve your cash flow problem, and have a new partner for the future growth and profitability of your small business.

The Small Business Cash Flow Problem

 

 

It is often said that "cash flow is the mother's milk of small business."

 

One of the great benefits of being a citizen of the US is the relative ease of starting a new business, which is the dream of many Americans. Despite the enormous commitment of time and effort required, the limited and daunting probability of ultimate success, millions take the plunge every year. Everyone wants to be the next Steve Jobs, Bill Gates, Elon Musk, etc.

 

The point of this article is that capital is not only required to start a new business, but it usually increases over time depending on a few factors, which vary by industry. Often, new, hopeful entrepreneurs borrow from family and friends to obtain startup capital but not only tend to underestimate the initial capital requirement but also soon develop new, unexpected cash flow problems. 

 

Classical economic theory teaches us that all economic systems, such as small businesses require and utilize three (3) inputs, to one degree or another, to obtain one (1) output. The inputs are capital, land, and labor. The inputs have costs, which are interest, rent, and wages, respectively. Most U.S. small businesses are in service businesses rather than manufacturing because of  the capital required for entry is  astronomical, which is why services businesses are the most popular. 

 

Cash flow is not directly related to profitability. It's measured by the difference between and the timing of outgoing and incoming cash. Small service businesses perform their services for their customers to obtain incoming cash, which is known in accounting as "revenue."

 

The two (2) reasons that small businesses develop cash flow problems are sales growth and slow or delayed customer invoice payments. All medium and large businesses require "dating," or invoice payment terms, which is truly a disguised, interest-free loan from vendors even though small businesses don't think of it that way. They think of it as a commercial norm; a requirement to do business with the customer which is a larger business of government entity, which is probably true.  

 

The Cash Flow Solution

 

There are few solutions for small business cash flow problems. They mainly consist of the following:

    1. Borrowing more money from family and friends.
    2. Convincing customers to pay your invoices faster.
    3. Obtaining conventional bank financing.
    4. Factoring you invoices.

 

In most cases, choices 1-3 aren't possible. Family and friends will ask "since you haven't repaid my initial loan yet, what assurance do I have that you'll repay this new loan"? Your customers will say that there invoice payment terms cannot be changed. Banks will require two (2) years tax returns and financial statements showing not only that your business has the net worth to repay the loan, but that it has the profitability and cash flow to do so. But you need the loan because you have negative cash flow.

 

Invoice factoring, the fourth choice is the most likely and the choice upon which most small businesses rely. It's a great solution if your customers pay in a relatively timely manner and your invoices don't become problematic.

 

Also, not all factoring companies operate in the same manner. There are big differences. Please check out the links on this website, including the menu items at the top and bottom of each page to learn more about how we have made it so simple to factor your invoices, solve your cash flow problem, and have a new partner for the future growth and profitability of your small business.