Capital and Financial Structure: The Fourth Cause of Poor Cash Flow

Often a reduction in interest charges as well as significant cashflow improvements can be achieved with a regular review of existing debt.

A good place to start is to list all bank loans, mortgages, finance company loans, hire purchases, credit card debts, and any other debts (don’t include amounts owed to suppliers in this list). Add columns to cover:

The amount of the debt owed

When evaluating the impact of debt on cash flow, it’s important to consider the amount of debt owed as a significant factor. High levels of debt can put a strain on cash flow by requiring regular debt service payments, such as interest and principal repayments. These debt obligations reduce the amount of available cash for other business activities, potentially leading to poor cash flow.

The interest rate being charged

The interest rate being charged directly affects the cash flow of a business. Higher interest rates increase the cost of borrowing, resulting in larger interest payments and potentially straining cash flow. This can limit the amount of available cash for other business activities and impact overall financial health.

Whether the interest is charged on a fixed or floating rate basis

A fixed interest rate remains constant throughout the loan or debt repayment period, providing stability and predictable cash flow. On the other hand, a floating interest rate fluctuates based on market conditions or a specified benchmark rate. This can lead to varying interest payments over time, potentially impacting cash flow unpredictably.

Repayment terms (the number of years the debt is to be repaid over)

The repayment terms have a direct impact on cash flow management. Longer repayment terms typically result in lower monthly or periodic payments, which can ease the immediate burden on cash flow. However, longer repayment periods also mean a more extended commitment to debt and potentially higher overall interest expenses.

Perhaps your debt can be consolidated, financed by one lender, and paid off over a longer term. This will help you retain more cash in the business which is vital for growth (or even just to cover expenses and your drawings).

Are the drawings you take from the business for personal expenses placing pressure on cash flow? If so, that might mean that we need to look at strategies to lift the profitability of the business. It might mean that your drawings are just too high for the business to support right now. The business may need an injection of capital to fund its growth.

Here’s an interesting exercise for you to do. List out your annual personal expenditure in detailed categories; everything from rent, childcare, groceries, and eating out. You may need to prepare yourself for a shock. If you’re serious about this, we have a Personal Budget Template that you can use to make life easier.

Take control of your cash flow today!

A regular review of your existing debt can lead to reduced interest charges and significant cash flow improvements. Start by listing all your debts, including bank loans, mortgages, and credit card debts. Assess the amount owed, interest rates, fixed or floating rates, and repayment terms. Consider consolidating your debt for longer-term financing to retain more cash in your business.

Are your personal expenses putting pressure on cash flow? Evaluate your annual expenditure and identify areas where adjustments can be made. Our Personal Budget Template can simplify this process. Optimizing your debt and capital structure is vital for cash flow. Let us guide you through the process by preparing an updated personal budget and Cashflow Forecast. Discover the extra cash your business can generate with simple changes. Attend our Cashflow & Profit Improvement Meeting to calculate your potential savings. Don’t fear forecasts; they’re a crucial tool for business success. Rest easy knowing you’re in control of your cash flow. Contact us today!