Last editedJan 20202 min read
It's wise to keep some capital easily accessible to tide you through such times when money flowing into your business isn't keeping up with money flowing out.
Capital should be used sparingly to cover cash flow problems. It's wise to keep some capital easily accessible to tide you through such times when money flowing into your business isn't keeping up with money flowing out. However, unused capital represents an opportunity cost to your business – ideally it should be put to work in helping your business to grow.
“For our clients, these are the main causes of cash flow issues: […] They are living hand to mouth with their working capital and don’t seem to be able to have 90 days of cash in the bank.” - Heather Townsend, Chartered Accountant
If you don't already have enough capital to cover possible lean times, consider building up more of a buffer. Putting a little aside each month can help your business through tough times, just as it's wise to save a little money, personally, for a rainy day. This might be easier said than done – in both cases – as market economics make it hard to do, but a capital buffer could make the difference between your business surviving or dying in lean times.
Three ways to increase your capital and limit the effects of negative cash flow
Go fundraising. Cash from outside your business can help boost your capital, but it doesn't come for free. Banks are increasingly reticent to hand out business loans, and even when they do, the interest rates can be punitive. Venture capital funding is increasingly available for large and small businesses alike, but requires handing over some equity in return. Lending the money to yourself, from your personal finances, is potentially risky as it may be secured against your own home. If you're sure your business has a profitable future, this type of funding can give it a boost. Just think first about the possible implications.
Increase the profitability of your business. Since you're in business to make money, you'll already be doing whatever you can to maximise profitability. But other people might have some useful insight. Talk to a business advisor or accountant to see if they have any advice. They may see opportunities that you can't, thanks to their wider experience. If you can increase profitability, you'll be able to build up capital to see you through tough times.
Be aware of business fluctuations. Most business sectors are busier at some times of the year than at others. For example, fashion retailers have seasonal fluctuations, whilst other sectors may see increased spending in the months before Christmas and other holidays. If you can adapt your spending to this ebb and flow, for example by taking on casual staff in busier times, you can avoid overspending in the quiet times, which should help boost your capital reserves.