We have written previously about the importance of creating a cash flow forecast, and regularly checking your cash flow. Forecasting as accurately as possible makes developing and running a business much easier. It is, however, hard to prepare a cash flow forecast when your cash flow is not predictable.
The reasons behind your unpredictable cash flow need to be identified in order to find a workable solution.
Isolate your unpredictable cash flow
Identify constant cash flow
There are many reasons for unpredictable cash flow, and once you are aware in advance that you are entering a period of slow payment, you can work out a method to rectify the situation. Many periods of uncertainty are particularly relevant to certain markets.
Weather can be an unpredictable factor for many companies, especially the trucking or distribution industry, where it can play a huge part in generating a period of unstable cash flow. Bad weather can delay or prevent the movement of goods to their final destination, and this can result in delayed or no payment at times. There will be unpredictable weather patterns over which nobody has control, but planning in advance for periods that are seasonally bad can certainly help with your cash flow forecast.
Interest Rates and Exchange Rates
A rise in interest or exchange rates may cause you problems if your customers pay late, certainly if you are relying upon a bank loan, or credit cards to cover your expenses. Carefully examine the patterns and trends, so you can at the very least build these possibilities into your cash flow forecast.
Manufacturing and distribution companies and staffing agencies are especially aware of seasonal changes, and these should be reflected and re-visited in the cash flow forecast. While more money is coming in during the productive part of the year, careful planning needs to go into the periods when business is slower. Busy periods require money up front to:
Generate increased product
Run more machinery
Hire extra staff
For example, a cap company specializing in baseball and football caps needs to prepare for an influx of orders and hire more employees during the months leading up to football and baseball season, but they also need to look at the variation in orders from year to year, as well as which other manufacturers are entering the mix. If they examine best, most likely and worst case scenarios, and enter each of those into their cash flow forecast, they will have a better idea of their cash flow for the year.
Factoring your accounts receivable allows for a smoother transition through the unpredictable times. Knowing when your invoices will be paid will enable you to forecast your unpredictable cash flow more efficiently. Factoring also gives you the freedom to:
Bid on government contracts or contracts with companies that are traditionally slow to pay but are reliable payers
Extend credit or payment terms to new or existing customers
Contact one of our professionals today to find out how Invoice Factoring can remedy cash flow dilemma’s.