Impact of Cash Flow Management on Your Business Loan

Cash flow management is a critical aspect of any business. It is the act of balancing the business income and expenses almost on a daily basis. Many people confuse cash flow with the profits of the company. These two concepts are entirely different from each other. Cash flow is the movement of cash in, and out of the company whereas profits are the total differences between the income and expenses.

The cash flow will differ from industry to industry and business to business. The cash flow management for a manufacturing company is different from that of a business dealing in the retail sale of products. Hence, it is necessary to understand the cash flow system for your company before you take steps to address its issues.

Different from profitability

You can have a hugely profitable venture, but the business would not sustain if there is insufficient cash flow. Cash flow management is about how quickly you realise your current assets into cash. A business concern can have an incredible profit figure at the end of the year, but if the realisation of the debtors takes an unduly long time, the company can go into bankruptcy very soon.

How cash flow affects the profitability

Consider the case of an automobile spares manufacturing company. This company manufactures spare parts like brake linings, seat belts, and other vital aspects of a particular automobile brand. The company has to source its raw materials from the market. The suppliers of the raw materials give a credit period of 90 days. The company takes about 15 to 20 days to manufacture the auto spare parts.

However, the automobile manufacturing major takes more than 120 days to clear their bills. Under such circumstances, the spares making company can face problems catering to the raw material suppliers. There is a mismatch between the current assets and current liabilities leading to an adverse cash flow situation. It can affect the profitability of the business enterprise in the long run.

What does such a situation force you to do? You resort to taking business loans to bridge the gap. It brings in a new expense into the equation in the form of interest expenses. The rising debt costs can result in the overall costs going over the breakeven point thereby affecting the profitability.

How do you manage the cash inflow and outflow?

Having a cash flow analysis in place is essential. Making a cash flow statement is critical to start cash flow management. Cash flow management begins with knowing how much cash you have on hand. The second aspect of cash flow management is to estimate the inflow of cash in the immediate future (could be a day, week, or month). The outflow of cash is also necessary. In case you require additional money to meet your immediate expenses, the best solution is to look out for different Types of Business Loans.

Different types of Business Loans

Banks have various loan products in the market to cater to your cash flow management. Here are some of the common types of Business Loans.

  • Cash Credit: Almost all the banks in India have cash credit facility to finance your working capital gap. It takes care of your immediate cash flow management. You get liquid funds in your hand to cater to the payment of your creditors.
  • Bills discounting: On successful completion of the project, the companies raise bills or invoices on their debtors. The bills discounting facility allows the business enterprise to get the payment of their bills in advance. It provides them with enough liquidity to purchase raw materials for the next cycle of production.
  • Invoice Factoring: It is a new kind of financing option available to business enterprises. There are specific invoice factoring companies that provide immediate finance against the invoices they raise on their clients. It is similar to the bills discounting facilities in many ways.
It is always better to avail short-term loans to cater to cash flow management issues. Banks have new Business Loan products with repayment schedules less than one year up to even Rs. 50 Lakhs depending on the financer.

It is crucial to understand the importance of cash flow management for ensuring better profitability. You need to realise your debtors in the quickest manner possible. Bridging the working capital gap is the most important aspect of cash flow management. Business loans can help you do so in the best way possible.   

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