As you know only too well, you don’t pay rent, meet payroll or pay your bills with profit.
You pay them with cash.
A business can make a lot of sales, have a book full of orders, have delighted customers and clients, have a great reputation, be growing, and yet still go broke.
Why? Cash flow.
The business might be profitable on paper, but have no money left in the bank.
A growing business is often hungry for cash. The tragedy in this is that cash flow crises can often be averted. They can be predicted, planned for, and then contingency measures put in place.
For example, if a business has seasonal effects where some months are busier than others, or if a business knows it has some jumps in expenses or fixed costs approaching—such as moving to a larger premises or hiring more staff to cope with growth—then these expenses can be planned for and compared with the planned income in those months.
Which would you prefer to do?
(A) Call your bank manager and ask for a short-term loan or increase in overdraft when you are urgently in need of the cash (and therefore stressed, and desperate, and not in a great frame of mind to negotiate good terms), or
(B) Call your bank manager 6 months in advance and meet with him or her to explain the coming cash crunch, the reasons behind it, and plan for the funding in a calm, relaxed, totally-in-control manner?
Not only would you get the loan, you’d impress the bank manager and strengthen the relationship for further funding, should it be needed to support your growth.