There are many situations when a business could find itself with funding problems. But what might bring about these problems in the first place and what can you do to prevent them?
One cause of funding problems could be your financial forecasting – not budgeting and planning effectively. To escape this:
- Rather than focusing on the month-end financial forecasting, be aware of mid-month overdraft peaks. They can leave you with insufficient funds to cover the rest of your monthly expenses.
- If you have borrowed money, ensure that your interest payments and capital repayments are achievable within your forecasted cash flow. Having a debt service commitment that is too tight could leave you susceptible to a cash shortage or cause an overdraft excess.
- Try to avoid having too much reliance on short-term debt. If you do, your loans may then require annual renewal and expose you to a withdrawal of loan arrangements or changes in the terms and conditions – usually not in your favour!
Control of Cash
You could also expose your business to a funding problem due to mismanagement of cash. To avoid this:
- When purchasing capital assets, don’t use all of your cash. This could leave you short of future working capital for day-to-day trading purposes or finance business growth.
- Have sufficient debtor control. Ensure you collect debts promptly and don’t allow yourself to be too reliant on one customer. If not, the interruptions to your cash flow could put pressure on your working capital and your borrowing limits.
Preventing Funding Problems: In Summary
Take simple steps to prevent finding your business suffering from funding problems. Have awareness of your anticipated expenses and cash flow and don’t get caught by unexpected payments. This will allow you to maintain the confidence of your business’ funders and allow you to grow.
Finding yourself with funding problems can leave you feeling overwhelmed or even helpless in your business, unsure of where to turn. At Ampios, we have years of experience across a range of sectors so if you need help, don’t hesitate to get in touch.
Alan Wilson – Specialist in Banking Relationships & Borrowing Arrangements