Businesses rarely have cash on hand when they require it. Unlike those who work for a living in the industry, company owners must deal with economic cycles, unanticipated events, and their customers’ desire to pay on their schedule.
There will be occasions, now and into the future, when working capital issues arise they face problems in payroll services or tax preparations and require financing quickly. What advice can you give them on maintaining it?
This post examines five basic techniques to best advise your client on their journey to obtaining proper resources.
Forecasting Cash Flows
It’s a concept that every business owner should grasp. People frequently manage their family finances in a disciplined manner but make overly optimistic predictions of their businesses, putting them in significant financial problems.
When someone is paid by salary with the possibility of the year bonus, aware of two things:
- What is their current cash flow situation?
- The chance of a future monetary bonus
Budgeting for monthly bills is a short-term forecasting exercise. Estimating the quantity of their annual bonus and how they will spend the cash is more in line with long-term forecasting.
Cash flow forecasting for a business is challenging. The company may be cyclical, with more money in the summer and less in the winter.
Clients may not pay on time as a result of the economic downturn. Optimism can be a huge stumbling block. If the company unexpectedly improves, owners may believe that this is the “new normal” and that the good times will remain indefinitely.
Instead of working down debt or creating a financial reserve, they increase their expenditures. They tend to forget that the economy and business operate in cycles. If the pattern shifts and the company lags, it’s simpler to dismiss it as a blip on the radar rather than a change in the general trend.
As their accountant or virtual bookkeeper, you can assist them in making long-term financial decisions. As part of their company strategy, they must implement cash flow forecasting. They must examine data to detect trends.
It’s a conservative approach, but it can also help you spot possibilities. If the business owner plans appropriately, there may be future growth and expansion.
The Importance of a Credit Line
Your logic was evident when you encouraged your customer to open a line of credit with their bank as soon as they launched their business. Their cash flow is erratic, but they must pay their debts on schedule.
Credit card debt accumulates because it is considerably easier to spend than being disciplined and paying off debt. Suddenly, they are faced with a massive unpaid sum.
When rates are low, your clients will not perceive the benefit of reducing their remaining debt to zero. Use the worst-case scenario to demonstrate the logic: You’ll need cash to keep your firm afloat if the economy slows and customers cancel orders or defer payments. Their bank’s line of credit is the quickest and most convenient way to get money.
Debt Consolidation
Banks like to lend to companies that will repay their loans. Personal liability is a significant distinction between private and corporate financing. The bank has choices if a person owes the money to them and defaults.
When a company defaults on a loan, its options are restricted since banks are wary. It’s conceivable that your client will need to borrow money when things aren’t going well.
If a bank lends cash and the customer makes timely payments and repays the loan, the bank is more substantial than a company that borrows more considerable amounts. To look at it another way, you’ve established a long record. Financial flow forecasts can help you spot when you have a cash surplus, allowing you to pay off debt.
Make a personal connection with a lender.
The world has altered dramatically, and Local bank locations are no longer the exclusive option for banking. Large banks serve multistate markets. Companies can altogether avoid banks. Lending from Tech lenders may not require any face-to-face interaction.
You want to establish face-to-face contact with local lenders. Financial companies have stronger ties to their communities than multi-state banks. They are usually operated by residents who are members of the chamber of commerce.
For these ties to the community, they are invested in the success of local enterprises. It would be best if you got to know your bankers as business owners. Please bring them to your place of work regularly. Allow them to observe how your company operates.
Even yet, ask your team to disclose their future ambitions. Clients should aim to make lenders emotionally invested in the company’s success. They will already know the track record and how they intend to use the money to take funds. They also tend to make quicker decisions.
Recognize the Different Lender Available
People frequently believe that banks are their only form of financing. While this is generally true, state and federal entities can assist small firms in obtaining funding.
The Small Business Administration (SBA) works with creditors, primarily banks, at the government level. There are three categories of loans: 7(A) loans, 505 loans (usually asset-based), and microlensing.
For example
New York has an Empire State Development agency that focuses on enterprises with less than 100 people. They also provide a list of available programs. You and your client should look into the programs offered in your state and whether or not your customer qualifies.
Sum up
The significance of acting rather than reacting is a common thread that runs through all five examples. Your client who owns a business must prepare ahead. They should have a line of credit, personal relationships, and a banking history until they need funds. Forecasting cash flow is an integral part of the process.
