As a business, it’s important to understand how cash on hand can impact your ability to expand and develop, and how contra dealing can be a useful way to smooth out your cash flow. Being able to take advantage of opportunities as they arise is hugely important, especially for new businesses, which means it’s vital to have a way of quickly financing expansion; say a cheap property becomes available and you’re keen to move in, you’ll need space in the balance sheet to make this work.
This causes a problem, though, because whilst you need some cash in the bank to finance expansion, you should also be ploughing money back into the business in operating costs, equipment upgrades, employee salaries and marketing. Every pound is being pulled in two directions; should you spend it on advertising to generate sales, or save it to finance future investment?
The Importance of Smooth Cash Flow
When every pound you make is vital to the expansion of your business, it’s can be frustrating to send out invoices with a standard 30-day payment requirement. Most of your customers will pay reliably, but this gap between finishing a sale and receiving payment puts even more strain on your bank balance, and makes it very difficult to push ahead with your development goals.
Here’s where contra-dealing comes in; if your customer can provide useful services for you, or supply valuable equipment, you may be able to bypass the 30-day payment period altogether. For instance, you could be the owner of a small company that sells used cars. When you sell cars to a local taxi firm, they might well be looking to get rid of their existing vehicles; in this case, you can take their cars in as new stock, and discount the value of these vehicles from the cost of their new ones.
Since you would be using the money received from the sale of the first vehicles to purchase more stock, you’ve essentially eliminated the time lag between receiving payment and sourcing more stock. Your cash flow remains intact, because you aren’t waiting on payment, and as a bonus you can immediately put these new vehicles up for sale.
Expanding With Contra Dealing
Being able to move quickly is crucial to the success of any business, and relies on having effective methods for keeping your cash flow moving. Taking advantage of the opportunities to contra-deal whenever possible allows you to invest and expand beyond the constraints of your cash flow, and is a useful tool for any small business owner.