Did you know that in Australia, 46 per cent of businesses fail due to poor financial management?
Poor financial management in the food and beverage business can be avoided by keeping cash flow up.
Cash flow is the vital blood that pumps through a business to keep it afloat. So how can your business keep cash flow up even if times are leaner than expected?
The golden rule of business finance
The golden rule of business finance is to buy long-term assets – say houses and cars – with long-term liabilities – car loans and mortgages.
The same is true for short-term assets such as inventory and consumables. You need to fund them using short-term liabilities such as operating capital or lines of credit.
“Crossing the streams” often lands business, especially in food and beverage retail, in trouble.
Therefore, as a business owner, you need to separate the long-term assets and liabilities from the short-term ones. Though you might balk at taking on more debt, this could be a good thing in the long run as you expand.
Taking on the bigger leagues
If you’re looking to expand your business; perhaps buying the space next door – you’ll also need other assets to accommodate the expansion.
As we’ve just discussed, buying inventory, equipment, and tiding yourself over before the cash starts flowing – all short-term assets – using a long-term liability is a recipe for a disaster.
To facilitate the shorter-term assets that may perform (make you money directly) or not perform (do not make you money directly but are necessary; like chairs and tables for example) an unsecured business loan may be the answer.
Unsecured business loans
Procuring unsecured business loans – loans that don’t require collateral – used to be a bugbear for businesses.
With rules relaxed in recent years, gaining approval for unsecured business loans is much easier.
Business finance expert and Savvy Managing Director Bill Tsouvalas says that most businesses with demonstrable revenue and at least six to twelve months of operation can qualify for unsecured business loans.
“This can prove valuable to a business that’s looking to expand, renovate, or pivot into other business areas, such as running a dark kitchen in the evenings,” he says.
“It can help with cash flow, inventory, overheads, and consolidating debts. Terms can range from 12 to 24 months and depending on the lender, there aren’t any penalties for early repayment.”
Other types of finance for medium-term assets
Other types of finance a business can use for medium-term assets are invoice financing, lines of credit, and overdrafts.
Invoice financing turns unpaid invoices into instant cash – usually 75-85 per cent is paid upfront by a lender.
The rest, minus a fee and a percentage, comes when the invoice is paid. Lines of credit is a recurring account – much like a credit card – which your business can access at any time.
A business overdraft means you can keep spending when your balance goes into negatives.
Tsouvalas says these can be handy, but come with interest.
“These are all great options for keeping cash flow up but lines of credit and overdrafts can come with recurring interest,” said Tsouvalas.
“Just like a credit card, if you don’t pay off the balance you’ll owe more and more interest. Invoice financing can give you access to your cash quickly, but if you become reliant on it, it will eat into your profits which is also cause for concern.
“You should always consult a financial professional before making a decision to take out a credit product.”