Archive | May, 2012

Finding The Right Financing

29 May

A term facility, invoice discounting facility, revolving line of credit, purchase order financing, invoice sale, private high-interest loan, operating lease?

We don’t always know what is most suitable at a particular moment in time. Or for that matter, which lenders are more appropriate for what type of financing. And since lenders change their lending criteria by region regularly, and there are range of private lending sources emerging, it can be quite confusing.

We at Bilbus take the view that a business needs options and that different lenders will suggest different alternatives. Wider financial choice, direct to the Bilbus dashboard.

A business with healthy invoices to large customers is able to tap the centuries old invoice finance market, benefiting from the personal touch of an invoice financier or factor.

Businesses with a good sales pipeline can use their invoice and collections information to strengthen their credit appeal for a more traditional financing facility, whether from a bank, commercial or private lender.

Receiving a good order can pave the way to order financing and a seat on the business growth train. Businesses with variable quarters but good customers and a good sales pipeline find it easier to arrange a line of credit that can be used to manage the down periods and paid down when sales come through.

Would a simple term loan facility be simpler? Perhaps, if this suits the business needs. If borrowing for equipment, maybe a lease would be better.

imageIn all cases, we believe that showing the lender the right story helps them make the right decisions and suggestions. Too often, a business gives insufficient or unorganized information to the lender and takes a chance that the lender will take the time to create a concise and compelling business case themselves. With a concise summary of what the business does, what it needs, why it needs it and what information it has readily available, the right lender can respond quickly.

Bilbus helps a business develop and strengthen financing relationships. As businesses grow and change, so do financing needs.

Bilbus is a working capital financing hub that enables small businesses to invoice, collect and connect with commercial lenders via a single dashboard

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Part 3: Cash Flow vs. Income and the Working Capital Cycle

22 May

Often when discussing their finances, small business owners regard income and cash flows as one in the same.  In many cases this is true just by the nature of how they collect payment for a sale.  The difference is really about timing. The important factor is that sales revenue is the actual sale or provisioning of goods and services that is recognized as the exchange happens.  Cash for that revenue may or may not be exchanged at the same time the goods and services are given to your customer.

So, for instance, you made that great sale to the giant media company today for $100.  Today you have sales of $100. The invoice for that sale says payable in 30 days. You will have cash flow 30 days from now for $100, today your cash flow is 0$.  However, if you own a coffee shop and get cash every time you hand out a cup of coffee, your sales will equal cash inflow.

Yes, cash flow and income are different. Cash flow is the money that flows in and out of the firm. While income or profit, is what remains from sales revenue after all the firm’s expenses are subtracted.

It’s important to realize that you can show a nice net profit today, but can’t pay your employees because your cash flow is negative.  Not recognizing this difference is one of the biggest mistakes a small business owner can make.

This leads us to the most important thing every business manager should understand: The Working Capital Cycle.

Working Capital CycleCash flows in a company are best described as a cycle.  Sales beget cash to pay employees and buy materials to create more products to get more sales to generate more cash.  The better you are at keeping this pin wheel turning, the faster your business grows.  Consequently, the faster your business expands, the more cash it will need.

The cheapest and best sources of cash exist as working capital right within your business.

Managing the amount of time between the moment when your business begins investing money in a product or service, and the moment the business receives payment for that product or service is the working capital cycle. For instance, inventory can be looked at as potential energy stored in your company. The cash used to buy or make the inventory is stored until it eventually converts into product sales.

The cycle balances two halves: cash absorbing elements such as inventory (stocks and work-in-progress) and receivables (debtors owing you money); and cash releasing elements like payables (your creditors) and financing (equity or debt). If you collect payments later, more cash is locked up in receivables, paying your suppliers later frees up cash, collecting receivables faster releases cash from the cycle.

Good cash flow comes from a short working capital cycle. For example, if you pay your contractors every 30 days but takes 60 days to collect from your customers; you have 30 days of working capital to fund.  Business growth is dependent on cash, or access to cash.  If a company can’t free up the cash from its working capital it will have to pursue other sources of finance, such as loans.

None of this is really ground breaking stuff, but those that can manage this cycle well, especially the early days of a business, increase their of success chances tenfold.

Bilbus is a working capital hub that enables small businesses to invoice, collect and connect with commercial lenders via a single dashboard.

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Cash Flow Series Part 2: Cash Flow Model

15 May

Cash Flow modeling is pretty much another way of measuring different scenarios to estimate cash flows.  It’s an important tool for investigating whether a project or business is viable. It’s as simple as sitting at the table with paper and a calculator and going through your lists of income and expense.  However, you will want to have a tool that is flexible enough to allow you to experiment with different factors so you can make decisions quickly.  The common method today is using a spreadsheet like excel, that lets you input different variables quickly.  This works pretty well when your information is relatively static and you don’t have to recalculate new inputs every time. Later we’ll discuss more about automated tools.

But let’s go over the basics first, below is an example of a cash flow forecast table from Bilbus.

The model is straightforward and can be copied on a spreadsheet.  The basic factors are capturing timing, income and expenses and placing them in manageable groups.

Cash Flow Forecasts can be setup with the following elements:

  1. Column headings for periods to measure (months or years).
  2. Rows grouped to cover:
    1. Inflows:  expected collections of invoices, spot sales, credit card receipts, and sources of finance, Inflow subtotal
    2. Operating Outflows: costs that are due to be paid in the future, including:  payroll, rent, utilities, suppliers, etc.
    3. Debt service and other capital changes such loan principle and interest payments or owner’s draw on equity or dividends.
    4. Calculation of the net cash flow for the period  (Inflows-Outflows)

An additional view is looking at the cumulative cash to show whether your total cash is decreasing or increasing over time.  That’s done by starting with the previous periods ending bank balance and adding the current periods ending cash flow.  Models are simple enough, but now you need to understand what they are saying.

Next: Cash flow versus Income and the Working Capital Cycle.

Bilbus is a working capital hub that enables small businesses to invoice, collect and connect with commercial lenders via a single dashboard.

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