A guide to cashflow finance
Good cashflow management is essential to the health and success of any business. Cashflow is the increase or decrease in cash available to your business and, as explained by the Financial Reporting Council (FRC), represents cash in hand plus deposits your company may hold with deposit-taking institutions, minus any overdraft facilities your company enjoys.
In this way, cashflow provides the working capital needed by any business in order to meet its day to day expenses, pay creditors, suppliers and employees, and in order to respond to opportunities in the market to be exploited. Investopedia cites the readily-understood analogy of working capital being akin to an individual’s cost of living.
Working capital, then, is simply the difference between your current assets and current liabilities or debts.
Why you may need cashflow finance
Negative working capital is likely to spell difficulties for your business in meeting its normal, day to day obligations towards creditors and suppliers. In the longer-term, declining working capital may herald more serious problems for your business.
In order to improve your business’ cashflow, by increasing the working capital you may draw upon, it is possible to make better use of the assets already held, by way of cashflow finance.
Types of finance available
Cashflow finance and the management of your working capital may be achieved through the following methods:
- your invoices receivable from your customers are an asset and it is possible to “sell” this asset to a factor, who then acquires your invoices;
- in return, you receive a significant proportion of the value of the invoices (typically, around 85%) in advance, and the balance once the factor has received payment of those outstanding invoices;
- naturally, the factor charges a fee or commission for the services provided;
- this is a similar method for financing your cashflow, but in this case involves your borrowing against invoices receivable;
- since you continue to be responsible for collecting payment on outstanding invoices, your customers are less likely to become aware of such an arrangement;
- both factoring and invoice discounting are described in further detail by the Institute of Chartered Accountants of England and Wales (ICAEW);
- cashflow improvements may also be made by your hiring credit control specialists to ensure that invoices and debts are recovered on time;
- trade insurance, or trade credit insurance, is a form of insurance designed to protect your invoices receivable from customers who fail to pay you or who fall into insolvency or bankruptcy.
Why use ACF?
Cashflow management is vital to your maintaining a healthy balance of working capital. We have access to all the tools available to businesses such as yours for securing cashflow finance.
Simply complete our online enquiry form, or telephone or email us, to discuss your specific needs.