Best And Worst Types Of Businesses For Cash Flow
Some types of business are more likely to run into cash flow problems, while other types appear to be more resilient. If you’re a business owner, you might be wondering which category your business falls into.
But here’s a secret – no matter how inventive or simple your business model is, you can still have problems with cash flow.
Here is a rundown of the best and worst types of business for cash flow…
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Best types of business for cash flow
A business that keeps its clients on retainer will have relatively stable cash flow in comparison to project-based businesses. Retainer contracts are often mutually beneficial to businesses and their clients. Whilst a business gains consistent work and revenue, a client has the certainty of investment when it comes to their own cash flow.
A retainer contract means peace of mind when it comes to working capital to cover your financial obligations. It also means that your cash flow is more manageable.
Most service businesses tend to work with a mixture of retained clients and with project work (more on that later). But it’s safe to say that keeping your clients on retainer is one of the ways to ensure healthy cash flow.
Companies that offer Software as a Service (SaaS) are some of the largest and most globally recognisable businesses and appear most frequently on lists such as the Fortune 500, and the Forbes Top 25. But bear in mind that these lists are measured on profitability, rather than cash flow.
It’s fair to say the tech business is synonymous with success – Steve Jobs, Elon Musk, Mark Zuckerberg are all household names that made their fortunes in the tech world.
With internet-based delivery models, companies that deliver Software as a Service tend to incur less expenditure on raw materials than other business sectors. Fewer overheads, a low barrier to entry, and more opportunities to grow mean that tech companies tend to have good cash flow.
Worst types of business for cash flow
Your loyal customer base might think that your gastronomic experiments pay for themselves, but it’s more likely that deliciousness comes at a price. It turns out that you can buy taste after all.
In fact, the number of restaurants that went bust in 2017 increased by a fifth. With nearly 1,000 insolvencies in 2017, compared to 825 in 2016, the plight of the UK restaurant business is being blamed on expensive overheads and increasing market competition. If the naked chef can’t stand the heat then the restaurant business is certainly not any easy one for cash flow.
Delivery services seem to be causing a bit of a stir amongst restaurateurs too. And, of course, the mass closures and restrictions brought about as a result of the Covid-19 pandemic.
The restaurant business seems plagued with hurdles to overcome in order to run, and maintain, a healthy cash flow.
The cash inflows and outflows of a seasonal business fluctuate throughout the year. This inconsistent incoming is the main reason that seasonal businesses are some of the worst for cash flow.
There are many reasons why your business may be seasonal. You may sell Christmas trees, gazebos, or even swimming pools. Whatever the reason is, with temperamental cash flow you’ll need to factor that into your business management strategy.
Cash flow, as we discovered in a recent case study, needs to be monitored closely in order to survive the deluges and droughts that come with seasonal business. With inconsistent takings, it is essential for a seasonal business to keep track of its cash.
Property developers need to make a large initial investment and there can be a lengthy wait to see the returns. However, after the initial payout and the following hard work you’re left with a large sum of money to start the cycle all over again.
By definition, the property business is capital-dependent and cash flow poor, particularly for business owners that have no additional income. This is why, until they’re flush with cash, property developers tend to work two jobs in order to keep their development job afloat.
Cash flow for property developers is a game of cat and mouse. With times of cash droughts and alternate times of capital saturation, cash flow can be hard to keep on track.
Businesses that should carefully monitor cash flow
An agency is a business that provides a service on behalf of another business, or person. Whether you outsource support or materials, chances are your company can function with fewer overheads.
Fewer overheads mean spending less money upfront – which is good for cash flow – but agencies are often project-based. An intermittent inflow of cash may mean that your cash flow contains more troughs and peaks than a typical business.
Creative agencies are having to pay more attention to payment infrastructure to help with their cash flow. Reducing payment terms, turning to direct debit, and requesting half payment upfront in order to get paid faster are all ways in which agencies are getting paid faster.
Additionally, investment in a functional, and scalable tech stack provides cash flow solutions for agencies. Integrating multiple apps, networking on social media, and running a business remotely, can help with the lumpy cash flow that comes with project work.
Franchise businesses have an advantage over other businesses in that they, particularly if they’re an offshoot of a recognised brand, already have a reputation. Owning a franchise can mean combining your business acumen with the (hopefully) positive reputation of whatever company you’ve taken on.
A franchisor’s brand is its most valuable asset. But with a high initial investment, it’s still a risk to get involved in a franchise. However, an entrepreneur opening a new franchise inherits an established business model which can mean a head start in terms of the business working.
Ultimately, any business can fail. But monitoring your cash flow can help you navigate cash gaps before they become a major issue. With intuitive and visual cash flow forecasting, you can use Float to create a simple but powerful cash flow forecast for your business today.