How to know when your business needs funding
15 May 2018
A lack of cash is the number one reason why businesses fail. So knowing exactly when your business needs funding is crucial to staying afloat.
By gaining insight into the inflows and outflows of your cash, as well as the way you run your business, you can begin to make strategic decisions about applying for funding.
What funding can allow your business to do
Whether your business is growing, just starting out, or has been established for a while, access to funding at the right time can help to support your plans, whatever they may be.
Applying for funding means your business has the cash it needs to grow and expand without dipping into the red. It allows for more money to be invested in innovation, and provides you with a safety net for a rainy day.
Recently, there has been a surge of alternative finance options available on the market. Not taking advantage of the multiple avenues available to you and your business could mean the difference between thriving and barely surviving.
Accessing funding as soon as you know you’ll need it will ensure you get the best rates, from the right provider.
Forecast Your Cash
But how do you know when your business will need funding? Assuming you’re not psychic or blessed with a sixth sense (“I see cash gaps”) the best way to understand the impending need for finance is to forecast your cash.
Cash flow forecasting can show you where and when a cash gap may appear. Forewarning means that you can arm yourself against a cash crisis. By proactively applying for financing you can provide yourself with a cash cushion for you and your business.
As well as allowing you to plan for a rainy day, a cash flow forecast can help you to plan for your blue sky scenario. Seeing light on the horizon means that you can apply for funding to fuel your business, rather than to bail you out of a sinking ship.
Regardless of what you need the funding for, a cash flow forecast can show you the true cash position of your business. A cash flow forecast is an invaluable tool for growth, letting you know that you have the right money at the right time.
Cash flow forecasting can be done in a spreadsheet, in the same way that budgeting for profit and loss can be. However, intuitive and visual software can make a real difference between understanding the journey of your cash and taking a wrong turn.
Software like Float can save you up to eight hours a month in time otherwise spent updating, and poring over, spreadsheets. By populating your forecast with actuals pulled in from your accounting software, Float enables business owners to fully understand their cash flow - making it far easier to make funding decisions.
Forecasting can allow you to see the future of your cash position. But, knowing how much of a cash cushion you’ll need in the bank is also important when it comes to applying for funding.
It’s a good rule of thumb to keep at least three months’ worth of expenses in their bank. Depending on your aversion to risk, your cash cushion may be particularly plump or fearlessly flat.
You may decide to keep less cash in the bank, because you would rather invest all of your money in expansion, innovation, or whatever cryptocurrency you can think of. But, if you do, you’re more likely to need plans in place to apply for last minute business funding. That’s where a resource like Funding Options can be invaluable, providing you with the right funding option for your business at the right time.
Keeping a larger amount of cash in your bank means that you have less of a need to apply for funding. However, no one will ever have enough to cover every eventuality.
A cash cushion not only depends on your attitude to risk but on the type of business that you run. For instance, if you run a seasonal business you may find that at certain times of the year you have more cash in the bank. Every business is different, with varying needs at varying times.
Regardless of your attitude to risk, or the type of business that you run, it’s important to always plan to receive funding before you actually need it.
Catriona works in the Marketing team at Float. Check out more about their cash flow forecasting software here.