Cash flow from financing activities refers to the net cash from funding the business from external sources and repaying the loans.
For example, in a quarter, if the business borrows £100k from the bank and repays £20k, net cash flow is £80k positive under financing activities.
For a growing business, cash flow from financing activities can help a great deal in fuelling further growth.
For example, you can borrow at 3% and invest it for a 6% return.
I started working with a new client in November 2009. At that point, he had £800k an overdraft facility. In 2021, his overdraft facility increased to £10m. He uses the overdraft facility to invest in high-value assets like original art that he can flip quickly.
It may entice you to implement this in your business. While doing that, stay clear of these cash flow mistakes.
3 Cash Flow From Financing Activities Mistakes To Avoid
1 Not Getting Ready For Funding When Times Are Good
The best time to raise funding is when you don’t need it.
This works well if you are raising funding from investors.
In the case of a bank, you might not want to take on debt before you need it. But you can build your cash flows in a way that when the time comes to raise funding, your finances are strong.
Why is this important?
Because when an investor or a bank is not convinced about the strength of the financials and doubts the ability of the business owner to pay back, they deny funding.
If you have solid financials and are financially savvy enough to communicate the value of a business, then it’s a great position to secure funding.
Otherwise, get a coach or expert to work with you to communicate your cash flow position and projections, someone who can tell investors with confidence how much funding is required to grow the business and when they will be able to repay.
Also, learn to read a cash flow statement, make cash flow projections, and understand how to communicate your cash flow position to investors.
Don’t postpone this because you never know when you need outside help to keep your business alive.
2 Not Able To Communicate Your Funding Needs With Banks And Investors And So Not Able To Secure Funding
Have you ever experienced a situation where you realized there is a cash flow shortfall and you are unsure how much the cash flow is? Or should you go for an overdraft or a loan or a combination of both?
If you are not sure about your funding needs, how will you be able to convince the bank or other investors of your funding requirements, how much you need to borrow, what type of borrowing – overdraft, short or long term loan, or a hybrid between overdraft and loan – you want, what do you plan to do with the cash flow, and when do you intend to repay.
Many entrepreneurs do not have this cash flow clarity. So, regularly review your cash flow statement to identify cash flow gaps and your ability to repay.
3 Not Keeping An Eye On Business Credit Score To Improve Chances Of Securing Funding
Like a personal credit score, credit reference agencies keep a record of business credit score and be aware of it. If you want to take out a mortgage or loan, etc., in business, you also need to watch out for your business credit score. For this, you can follow business credit reference agencies.
Not checking up-to-date business credit score records is prominent mistake entrepreneurs make. But unfortunately, when it’s time to apply for funding, there may be information held with credit reference agencies that may not be true or old, which could affect your ability to borrow funds for your business.
Now that i have shared the cash flow mistakes to avoid, let’s look at the strategies you can implement under financing activities to improve your cash flow.
Cash Flow Improvement Strategies – Financing Activities
[strategy 1] Use A Business Credit Card
I started my business in December 2016 with limited cash flow. I approached the bank, and they offered me a business credit card with a £2,000 limit on it. I would use it for all monthly business expenses and marketing investments and pay it back in full when my clients paid me in 30 days.
In a way, i used the bank’s money on marketing to get more clients and improve my cash flow.
Because i always paid back in total, it was free money generating cash flow because i was using a business credit card. As my business grew, i got more cards and higher limits. It meant more free money to grow my business and cash flow.
[Strategy 2] Offer Third-Party Financing
Let’s say you sell $5,000, $10,000 packages. So it’s pretty hard for someone to pay you $5,000 straight away. You can say, “i can offer you a three or 4-month payment plan.”
Through the payment plan, you price it a little higher. So with the payment plan, it can cost 20% higher than the regular price. Otherwise, your customers have no incentive to pay the full price upfront.
To offer the payment plan, you can work with the financing companies. In that case, your customer pays a financing company month by month through a 12 months or 24 months contract.
It works great for the customers because they pay the amount over 24 months without interest to a financing company to be in your program.
For them, it’s a no-brainer. And you get the money straight away from the financing company, and you deduct between 10, 15, 20% of the value. So it’s no loss because you are charging a premium for payment plans.
Now, the question is, do you want to lose a client or get 15-20% less cash than usual? I am sharing this as a potential cash flow improvement strategy. You can do the same in your business.
Strategy 3 – consider invoice factoring
If your invoice is not due yet and tied up in debtors and you need funds soon, consider invoice factoring.
Here is how invoice factoring works
Your business will invoice your client a ltd – for, let’s say, £1,000.
The invoice is due 30 days from today.
You agree to involve invoice factoring company – b ltd.
B ltd will pay you on average 90% of the invoice value, which will be £900.
B ltd will collect £1000 from a ltd.
You get instant cash flow now to improve cash flow, and b ltd. Makes up a £100 cash flow margin from the deal.
Summary
Cash flow from financing activities can play a crucial role in growing a business. Business growth demands cash flow. So even when the business may be profitable and have processes in place to have the timing of cash flow right to ensure, the business always has positive cash flow, the business still needs to find funds from financing activities because there is always a steep cost to pay when scaling the business. This is where cash flow from financing activities comes in handy.
If you are planning to improve cash flow from financing activities, strike a balance to have enough cash flow for sustained business growth. Do not overcommit borrowings to run into severe cash flow problems.
