Why Cash Flow Management is Crucial for Growing Businesses

Struggling with cash flow management for growth? You’re not alone. Businesses in the process of scaling face a lot of strain and pressure. But there are ways to work around this and create more stability. In this guide, we’ll explore why growing is financially hard on businesses and how to overcome those challenges.

Cash Flow Management for Growth 101: Background and Basics

Cash flow is the movement of money in and out of your business. Your ability to manage it well can determine whether your business thrives or struggles to cover essential expenses like payroll.

Positive Cash Flow vs. Negative Cash Flow

There are two main types of cash flow: positive cash flow and negative cash flow.

• Positive Cash Flow: If you have positive cash flow, it means your business brings in more cash than it spends. You have more money available to reinvest, pay down debt, or create a buffer for future needs.
• Negative Cash Flow: If you have negative cash flow, it means your business spends more money than it brings in. This can happen during a slow sales cycle, when you are growing rapidly, or when payments from customers are delayed.

Cash Flow vs. Profit

Many people confuse cash flow with profit or focus exclusively on profit. However, this is a major oversight, as 82 percent of business failures are tied to cash flow management issues, according to Forbes.

• Profit: The difference between your revenue and expenses is profit. It reflects what is left after all costs are subtracted, but does not account for when money actually changes hands.
• Cash Flow: The timing and movement of money in and out of your business is cash flow. It shows whether you have cash available when you need it, regardless of what your profit and loss statement says.

You can be profitable, but still run into trouble if your cash is tied up and can’t be used for essential expenses. Managing cash flow effectively is how you keep the lights on while your profits catch up.

Why Cash Flow Management is Crucial for Growing Businesses

Many business owners dream of rapid growth, but it often comes with greater expenses and tighter margins. Without proper management, it’s easy to wind up with financial strain even when sales are increasing.

Growth Brings New Demands

Your obligations scale with your business. You may need to:

• Hire Employees or Increase Hours: Payroll expenses often increase before the revenue comes in, causing businesses to seek payroll funding solutions.
• Purchase More Inventory: Stocking up to meet demand can tie up large amounts of cash.
• Invest in Equipment or Technology: Growth often requires upfront investments that strain liquidity.
• Extend More Credit to Customers: Larger clients may demand longer payment terms, which slows incoming cash.

Revenue Growth without Cash Control Can Be Risky

A business can be growing on paper but still wind up in financial trouble. For instance, an oilfield services company may land a series of large contracts, but if those clients pay on net 60 or net 90 terms, the company might struggle to cover payroll and supply costs while waiting to get paid.

This is why cash flow is often referred to as “the lifeblood of your business.” If it stops, everything else eventually stops with it, even if your operations are in full swing and even if you’re ultimately profitable. Avoiding and managing cash shortages in growth is essential for this reason.

You Need Flexibility to Make Smart Decisions

Healthy cash flow gives you options. You can:

• Negotiate Better Vendor Terms: Cash on hand lets you take advantage of early payment discounts or bulk pricing.
• Invest Strategically: Cash flow’s impact on business growth is clear here. You’re in a better position to pursue growth opportunities when you are not financially stretched.
• Weather Setbacks: Seasonal slowdowns and unexpected expenses highlight the importance of working capital. When you have a strong cash position during these types of events, your business stays more stable.

Common Cash Flow Challenges

Even successful businesses hit cash flow roadblocks. Growth often magnifies them because your spending increases before your income has a chance to catch up.

Delayed or Late Invoice Payments in Business

• Slow Pay Cycles: Many clients have long payment terms to begin with. On top of this, around half of all invoices remain unpaid on their due dates per Atradius. Because of this, you might wait three months or more to get paid for work you completed weeks ago.
• Limited Leverage: Small or new businesses don’t often have the power to negotiate faster payment terms with larger clients.

Unpredictable Sales Cycles

• Seasonal Revenue: If your business depends on a seasonal surge, off-seasons can create cash shortages.
• Volatile Demand: New markets, product launches, or inconsistent marketing results can lead to uneven cash inflows.

Overinvestment in Growth

• Premature Hiring: Adding staff before securing revenue can leave you strapped for cash.
• Inventory Overstocking: Trying to prepare for a surge in demand can result in too much money tied up in unsold goods.

High Upfront Costs

• Large Projects: B2B and project-based businesses often invest heavily before they receive a dime.
• Equipment and Infrastructure: Expanding operations may require you to buy expensive tools, lease space, or upgrade systems.

Lack of Cash Flow Forecasting

• No Visibility: Without a clear forecast, it’s easy to overlook upcoming expenses or overestimate available cash.
• Surprise Shortfalls: Untracked obligations or unexpected bills can drain funds quickly.

Poor Payment Practices

• Inefficient Invoicing: Delayed or inaccurate invoices slow down payments.
• Weak Collection Systems: Failing to follow up consistently leads to aging of receivables and write-offs.

Quick Cash Flow Improvement Tips for Growing Businesses

Once you understand where cash flow problems come from, you can put systems in place to help prevent them.

Strengthen Your Invoicing Process

• Invoice Promptly and Accurately: The sooner you invoice, the sooner you get paid. Clear, professional invoices with correct details reduce delays and disputes.
• Set Clear Payment Terms: Use contracts or agreements that define when and how payments are due.
• Follow Up on Outstanding Invoices: Use reminders, polite check-ins, or automated tools to keep payments moving.

Leverage Faster Invoice Payment Strategies

• Segment Your Clients: Adjust your payment policies based on their risk and behavior. For instance, consider adding interest or additional charges for late and slow payers, or discounts for fast payment.
• Use Invoice Factoring: Rather than waiting for your clients to pay, sell the invoices to a factoring company like Viva Capital at a slight discount.

Monitor and Forecast Cash Flow

• Create a Rolling Cash Flow Forecast: Generate a 12-week rolling forecast to help you anticipate shortfalls and plan ahead.
• Track Receivables and Payables Weekly: Stay on top of what’s coming in and going out to avoid surprises.
• Use Software to Simplify: Many accounting systems now include real-time dashboards and predictive insights. Explore cash flow and budgeting tools.

Manage Expenses Thoughtfully

• Delay Non-Essential Spending: Postpone upgrades or large purchases until your cash position improves.
• Negotiate Vendor Terms: Ask for extended payment times or discounts for early payment.
• Build a Cash Reserve: Set aside funds during profitable months to create a cushion for leaner times.

Align Growth with Liquidity

• Phase Your Expansion: Grow in stages so you can maintain control over your cash position.

• Use Flexible Funding Options: Focus on short-term financing options that can help you bridge timing gaps without long-term debt.

Business Funding Options Comparison

If you’re comparing short-term funding options, a few common choices include:

• Business Credit Cards: If you have a personal credit score of 650 or greater and can pay off the balance before high interest rates, a credit card may be a viable option.
• Merchant Cash Advance: If your business has credit card transactions, a merchant cash advance (MCA) can provide you with upfront cash. Just be mindful of leveraging this method, as APRs can climb over 300 percent.
• Invoice Factoring: If you’re looking for business financing without debt, invoice factoring is ideal. Instead of taking out a loan, you’re getting advance payment on your invoices. The balance is cleared when your customer pays the invoice, so there’s no debt to repay.

Choosing the Best Factoring Company

When you’re ready to start looking for a top factoring company, consider the following:

• Speed and Reliability of Funding: Standard turnaround is 24 to 48 hours for payments. At Viva, we can provide advances in as little as eight hours.
• Transparent Fees: Every factoring company calculates charges a little differently. Look for a simple fee structure like Viva offers and ensure the numbers make sense for your business.
• Personalized Support: Some factors are generalists and have a general customer support line. At Viva, we have tailored factoring programs for different industries, and each client has a dedicated account manager to ensure you have a smooth experience.

Improve Your Cash Flow Management and Grow with Viva

If your business is facing cash flow management challenges due to growth, slow-paying clients, or unexpected expenses, Viva Capital can help. We offer small business funding solutions tailored to your needs, including invoice factoring. To explore your options and find the right fit, request a free quote.