What is cash flow and why does it matter?

Every small business owner wears a number of hats as they begin their journey as an entrepreneur. One of those hats is often accountant or bookkeeper, as business finances can't be neglected. When it comes to these roles, knowing the answers to "What is cash flow and how do you use it?" is key.

To ensure your business is healthy in the near future and long haul, let's examine what cash flow is, then dive into how you can perform a cash flow analysis and create a statement of cash flow.

What is cash flow?

Cash flow is a financial forecast that allows you to see money coming in and leaving as a result of things like your business activities, expenses, and debts.

Positive cash flow is when a business's money coming in exceeds its cash outflows. This is typically a good thing, as a positive cash flow often equates to stronger working capital. With working capital, a business can purchase necessary equipment, hire employees, and invest more in the growth and success of their business. Positive cash flow also opens you up to the possibility of paying back loans and other debts.

Will A Cash Advance Impact My Credit Rating?

How Traditional Merchant Loans Work?

Traditional merchant loans are a popular alternative to business loans for retail businesses. These advances are regularly used by businesses that need an ‘advance' on their sales and profits for a variety of reasons. The cash advance is repaid through the business' future income and sales revenue; repaid through credit card payments and mediated by a payment processing provider of the lender's choice.

This means that the borrowing business commits to the repayments on the lenders terms. For example, a florist who accepts credit card payments needs a ?10,000 business loan to pay a crucial supplier but has been rejected by a few lenders. They approach a merchant loan provider who offers the business the instant ?10,000 they need in return for a ?12,000 portion of future credit/ debit card sales over the coming months.

Most merchant lenders though, require the retail outlet to change payment processing providers. This means that even if the business requiring the advance has been working with a company that comfortably facilitates credit card payments and processing for many years, the merchant lender will require them to change to their preferred and partnered provider to facilitate the arrangement. Once the merchant loan is repaid, this can cause all nature of disruption to the credit card processing of the business and should they wish to revert to their processor of choice, they may incur additional fees.

Another pitfall with traditional advances of this nature is that there is no negotiation on the terms agreed. This means that even if the business takes off and can repay the advance early, they must stick to the rigid terms, therefore not allowing them to be more efficient and save money should they wish.

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