By Mark Sykes Head of Entrepreneurial Businesses at BDO

This won't be the first time you've heard that when it comes to business, cash is King. However, when you combine the challenges faced by entrepreneurs over the past two years with the current trading environment of supply chain and staff shortages, along with high inflation, this has never been truer.

At the outset of the COVID-19 pandemic, it quickly became evident that a positive cash flow is the operational heartbeat of running a resilient business through times of uncertainty. Yet there are many fundamentally good businesses that have weathered the immediate economic impact of COVID-19, which are now feeling the strain of reduced working capital because of depleted reserves.

The biggest cause of business failure often isn't the crisis itself, but over-stretching financially when emerging from challenging periods. Economic growth is positive but has slowed because of supply chain issues with many businesses unable to convert their order book to cash because of delays.

Having cash headroom protects against this having a knock-on effect and allows you as a business owner the freedom to operate without too many constraints. It also enables you to plan for future growth and make better decisions for the long-term.

The challenge is to remember that high sales growth and even profitability don't always equal positive cash flow. Even if your business is making healthy margins, it's still easy to get caught in financial difficulty if you fail to manage cash flow. There are so many external factors impacting this, the key is controlling what you can.

A recent survey carried out by BDO, as part of our report, The Ambitious Entrepreneur: Tackling Your Barriers to Growth, highlights the challenges that surround achieving a positive cash flow. The survey showed that more than a quarter of ambitious, entrepreneurial businesses (29%) say they expect cash flow to be the biggest hurdle to growing their business over the next 12 months. This was the number one concern, followed by growing sales and revenue (16%) and changing systems and processes (11%).  

Funding for future growth 

Given the ongoing challenges of COVID-19 and the ripple-effect it continues to have on businesses' finances, exploring all suitable sources of external funding is also a potential way to boost your balance sheet to invest for growth. The Ambitious Entrepreneurs report found that the businesses surveyed plan to access a variety of different funding options in the next 12 months, including government-backed loans and grants (73%), bank loans (57%), private equity investment (43%) and venture capital investment (38%).  

Funding can help to address immediate cash flow problems and best position a business for future growth by accelerating recovery, providing working capital to aid in the day-to-day functioning of a business. It also allows a business to hire the necessary talent to build exceptional products and services, reduce customer churn and create a purpose-driven workplace culture to support growth. What's more, when it comes to expanding into new markets, it allows businesses to plan and put in place the necessary infrastructure in a new geographic market, such as applying for business licenses, hiring regional staff, and setting up local payroll systems.  

Whatever the motivation, the biggest question is how often can you ease your cash flow problems and simultaneously attract funding. The answer is to develop forecasting and financial modelling - a cash flow forecast that should clearly illustrate your business model, including how revenue flows, seasonality effects on income potential over time, distinct income streams, how those incomes have been affected, expected costs and what type of investment would be required to get back to a state of ‘normal'.

No business environment is static, and risks will vary depending on circumstances, but it's essential for businesses to build a longer-term cash flow strategy that will allow them the freedom to innovate, grow, and maintain a competitive advantage.

The biggest cause of business failure often isn't the crisis itself, but over-stretching financially when emerging from challenging periods

View  The Ambitious Entrepreneur report here