Touker Suleyman, famed for his role in Dragons’ Den, stated in a recent programme that ‘if a company runs out of cash, it’s dead’. But many businesses fail to appreciate the significance of this statement, instead concentrating on sales over cashflow. There is the old adage that goes ‘sales are are vanity, profit is sanity’. But actually it's cash that keeps a business alive and it is vital to business success that the owner-manager understands the basics of cash flow.
Let’s start with some assumptions…
Company X has annual sales of £365,000 (makes the sums simpler!)
So just to start the business, the owner will need to invest £25,000.
But, we must remember that as the company grows, the cash requirement grows in proportion. So, if we multiply sales tenfold then the working capital requirement will be £250,000.
If a business has no stock and can balance debtors and creditors, then it may be able to manage its cash without the need for additional funds. However, most businesses will operate with a negative cashflow and will need additional working capital.
That’s where Invoice Finance comes in:
Let’s Consider the Same Scenario…
Company X has annual sales of £365,000.
The real advantage of using Invoice Finance to fund working capital is that it grows with the cash flow demands of your business. So, if we multiply tenfold again, rather than requiring £250,000 of capital, the company has positive cash of £110,000.
Of course this example is simplistic and there are many other factors to consider, but is essential at least to understand the basic principles if you are to manage your business’ cash flow successfully.
If you would like to know more about how Invoice Finance works and see how successful businesses have used these services then follow the links below or contact our friendly team on 01908 268888 or by email here.