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• 06 Feb

  How To Evaluate The Financial Needs Of Your Business

  We frequently suggest that prospective customers should evaluate the financial needs of their business before applying for finance. This ensures they understand how much money they need. So, we thought it might be helpful to outline how you might go about working out how much finance you need.

  Caveat Regarding Accountancy Advice

  At the outset, we should say that we are not accountants, and this is in no way intended as accountancy advice; it is just how we would evaluate our own financial business needs if we needed to apply for finance.

  If you need accountancy support this is our recommended firm of Chartered Accountants selected from our own experience.

  How To Determine the Right Amount Of Funding For Your Business

  

  It stands to reason that before you arrange business finance you need to know how much to seek. This ensures you apply for enough and allows you to check any offers received are fit for purpose.

  Structured Overview: How to Identify and Quantify a Cash Flow Gap

  1. Assess Your Current Financial Position: Analyse cash flow, balance sheets, and profitability to understand your business's financial baseline.
  2. Define Your Business Goals: Align your financial requirements with your short- and long-term objectives.
  3. Forecast Future Expenses and Income: Create projections to anticipate cash flow gaps and plan funding needs.
  4. Identify Key Financial Challenges: Pinpoint potential obstacles like late payments or rising costs to plan proactively.
  5. Explore Funding Options: Evaluate different funding solutions to bridge cash flow gaps effectively.
  6. Build a Contingency Plan: Prepare for unexpected financial challenges with an emergency reserve.
  7. Seek Expert Support: Work with accountants or finance brokers to navigate complex financial decisions.
  8. Monitor and Adjust Regularly: Continuously review and adapt your financial strategies as your business evolves.

  How to Evaluate and Bridge Financial Gaps in Your Business

  Understanding the financial needs of your business is essential to its running. However, it can also be extremely helpful when you want to identify if you have a cash shortfall and to quantify the size of that gap.

  Whether you're just starting out or managing an established enterprise, an accurate evaluation of your financial requirements ensures you can make informed decisions and access the right funding options. This article outlines a step-by-step approach to help business owners assess their financial needs effectively.

  1) Assess Your Current Financial Position

  Any financial evaluation for business should start by taking a snapshot of your current financial status. This includes:

  • Business Cash Flow Analysis: Examine the inflows and outflows of cash in your business. Identify any recurring cash shortfalls or surpluses. See our Cash Flow Guide. Any cash shortfalls will require resolution in the form of additional working capital. This could be from improving aspects of your cash flow or by seeking additional finance.
    
    For example, if in month 2 of your cash flow forecast, you see a shortfall of £8,000 - you will need at least that amount of additional funds to cover that shortfall. You should evaluate any shortfalls over a longer period of time (maybe 6 to 12 months minimum) so that you address your needs for the foreseeable future and not just the next few months. You may wish to build in a margin for safety, in the previous example you might seek a facility of at least £10,000 to adequately cope with that shortfall and leave some additional headroom on your facility.
  • Balance Sheet Review: Understand your assets, liabilities, and equity. This gives you a clear view of what your business owns versus what it owes. It may also identify assets that could be leveraged to raise any additional capital you require.
  • Profitability Check: Analyse profit and loss statements to see how your income compares to your expenses. This will give you insight into how profitability will affect your cash position over time. For example, if you are loss-making your cash flow will get tighter whilst profits could create surpluses to ease any cash flow problems.

  This foundational step highlights your financial strengths and weaknesses, offering a baseline for planning.

  You may well identify existing cash shortfalls during this process. These will need to be bridged in addition to any additional gaps created by your plans as covered below.

  2) Define Your Business Goals

  Your financial needs are tied to your business objectives. Clearly define short-term and long-term goals (see our section on Business Planning), such as:

  • Expanding into new markets
  • Increasing production capacity
  • Investing in technology or equipment
  • Managing seasonal fluctuations

  Each goal will require specific financial resources, so aligning funding with your objectives is important.

  3) How To Forecast Expenses And Income To Manage Cash Flow Gaps

  Create projections for both expenses and income over the next 12 months (or longer for long-term planning). Consider:

  • Variable costs like raw materials or stock and inventory
  • Fixed costs such as rent and utilities
  • Anticipated income changes based on market trends
  • Financial forecasting helps identify potential funding gaps before they occur.

  4) Identify Key Financial Challenges

  Pinpoint any barriers that could hinder your financial health, such as:

  • Late customer payments
  • Rising operational costs
  • Unpredictable market conditions Understanding these challenges allows you to plan proactively.

  If you need to boost your cash flow position see our article about Writing A Cash Flow Improvement Plan for tips and hints.

  5) Evaluate Funding Options

  FundInvoice can help you address funding shortfalls but you may wish to tackle it yourself. The important thing is to compare both the cost of financing but also the funding levels and security requirements.

  COMPARE FINANCE QUOTES NOW

  Depending on your needs, there are various funding options to consider. See our overview of All The Ways To Fund A Business.

  Compare providers and consider costs, repayment terms, and flexibility to choose the best fit for your business.

  Update your cash flow projections (and profit and loss projections) to include the benefit of the funding that you are seeking but also any additional costs. This both defines how much finance you need and shows and prospective funding partner how you plan to use their money. See our article that demonstrates How Factoring Can Improve Your Cash Flow Forecast.

  6) Build a Contingency Plan

  Unexpected expenses or revenue shortfalls can destabilise even the best financial plans. Allocate a portion of your funds to an emergency reserve to handle unforeseen challenges without derailing operations. See also Business Continuity Planning.

  7) Seek Expert Support

  If financial evaluation feels overwhelming, consult a firm of accountants and/or business finance brokers. They can provide insights, match funding solutions to your needs, and help you avoid common pitfalls.

  8) Monitor and Adjust Regularly

  Your financial needs will evolve as your business grows. Set a regular schedule to review financial performance and adjust your funding strategies accordingly.

  Summarising How To Evaluate The Financial Needs Of A Business

  Evaluating your company's financial needs is an ongoing process that requires careful analysis and planning. By understanding your current position, forecasting future needs, and exploring appropriate funding options, you can ensure your business is financially prepared to achieve its goals. For tailored advice or to explore invoice finance solutions, contact us at FundInvoice on 03330 113622 for confidential support.

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  FAQ: Identifying And Quantifying A Cash Flow Gap

  1) What is a cash flow gap?

  A cash flow gap occurs when your business expenses exceed the available cash on hand, typically due to delays in receiving payments or increased costs. Identifying this gap helps you plan for funding before it impacts operations.

  In any period you can add cash received to your existing cash-held position and then deduct the cash that's required for that period. This gives your net cash position identifying any shortfall or surplus.

  2) How can I tell if my business has a cash flow gap?

  Signs of a cash flow gap include struggling to pay suppliers on time, delays in paying staff wages or relying heavily on overdrafts or credit. Regularly reviewing cash flow statements and forecasting can reveal shortfalls.

  If you regularly prepare and review cash flow projections, you can forecast any future shortfalls and take action before they become an issue.

  3) Why is it important to quantify a cash flow gap?

  Quantifying the gap ensures you know exactly how much funding your business needs. It helps avoid borrowing too little (leaving the gap unresolved) or too much (incurring unnecessary costs).

  4) What tools can I use to identify cash flow gaps?

  You can use accounting software, cash flow calculators, or spreadsheets to track income and expenses. Many tools offer forecasting features to predict future shortfalls.

  5) What are the common causes of cash flow gaps in businesses?

  Common causes include:

  • Late payments from customers
  • Seasonal fluctuations in demand
  • Unexpected expenses
  • Poor financial planning or inaccurate forecasting

  6) How can I bridge a cash flow gap?

  Solutions include:

  • Invoice finance or factoring
  • Short-term business loans
  • Renegotiating payment terms with suppliers or customers
  • Improving collection processes for overdue invoices

  7) Can forecasting really help prevent cash flow gaps?

  Yes, accurate forecasting identifies potential shortfalls before they occur, allowing you to plan funding needs and adjust business strategies proactively.

  8) Are there specific funding solutions for short-term cash flow gaps?

  Yes, options like invoice financing and short-term business loans are designed to address temporary cash flow issues.

  9) How often should I review my cash flow?

  Ideally, review your cash flow weekly or monthly, depending on the size and complexity of your business. Regular reviews ensure you can address potential issues quickly.

  10) When should I seek professional support for cash flow issues?

  If you’re unsure how to evaluate your financial needs, or if your cash flow issues persist despite efforts to resolve them, consult an accountant or finance broker for specialist guidance.

  By Glenn Blackman