New businesses and old businesses alike routinely require debt and lines of credit to maintain operations. That’s because one of the most important determinants of a business’s ability to succeed in the modern age is cash flow.
Simply put, cash flow is the money that is transferred into a business and the money that flows out of the business. It is a measure of a business’s liquidity. Businesses that struggle with cash flow invariably find themselves in a pickle. That’s when things like financing and credit availability become important.
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How Does Your Cash Flow?
Cash flow is a two-way operation: Customers contribute toward cash flow by purchasing products and services from the company, and the company pays expenses, suppliers, and creditors. Sometimes, a business will experience negative cash flow where the money coming in is less than the money going out. In extreme cases, this can result in the closure of the business.
At times like these, it’s important to understand all resources at your disposal to avoid a negative cash flow situation. One of the many options available is credit financing. This is available in many different forms, but remember, each of these constitutes debt. They include the following:
- Credit Cards
- Personal Loans
- Business Loans
- Automobile Loans
Understand Your Debt and Your Cash Flow by the Numbers
Your business financing requirements will be best understood by maintaining a cash flow report. Some businesses prefer to maintain these on a daily or weekly basis. The most effective way of understanding your cash flow requirements is to conduct a comparative analysis of total sales due versus the total of your unpaid invoices. If a negative balance results, there could be a cash flow problem on the horizon. Businesses will do well to anticipate such problems by applying for loans well ahead of time. It is extremely important to maintain a “capital cushion” to guard against negative equity situations.
Act to Resolve Debt Before the Fed Hikes Rates
The current interest rate in the United States is in the region of 1.00% – 1.25%. However, the Federal Open Market Committee (FOMC), a branch of the Federal Reserve Board, is currently looking to hike interest rates before the end of the year. There are several meetings of the FOMC remaining: on Wednesday, 20 September; Wednesday, 1 November; and on Wednesday, 13 December. The highest probability of a rate hike is at the December meeting, with a 39.5% likelihood of rates rising 25-basis points to the region of 1.25% – 1.50%.
This means that businesses will do well to factor rate hikes into the equation well ahead of time to anticipate future cash flow shortfalls.
Plan Ahead to Avoid Negative Cash Flow
By locking in a low-interest-rate loan now, you will provide your business with an affordable capital cushion. That’s because when the Fed starts to raise interest rates towards the end of the year, the interest payable on business and personal loans will be higher. If you obtain financing after that happens, more of your profitability will go into repaying debt.
The USD was extremely bullish in recent years. In 2017, however, the USD retreated because of several factors, including volatility in US politics.
Additionally, the EUR is proving to be a bullish currency. In large part, this is due to the fact that Europe’s economy is on the mend, buoyed as it is by Germany’s performance. Moreover, recent election results in France and elsewhere have renewed confidence in the unity of the Eurozone, despite the departure of Britain from the single economic area vis-à-vis the Brexit.
At the same time, the US dollar index is down. The US dollar index measures the performance of the greenback against 6 currencies, including the EUR, GBP, JPY, SEK, CHF, and the CAD. It is currently 9.31% lower in 2017, in line with the general performance of the USD for the year. At a level of 92.85, it remains close to the 52-week low of 91.62. In contrast, the corresponding high for the past year was 103.82.
In short, by anticipating their cash flow requirements, businesses can lock in low interest rates and decrease the burden of high interest-related payments on debt.