Debunking Cash Flow

‘Cash flow’ has to be the most overused and poorly understood term in SMB finance. But what does cash flow actually mean and why do people talk about it so much?


By Luke Trickett

‘Cash flow’ has to be the most overused and poorly understood term in SMB finance. We all know the importance of cash flow and what it feels like when it works, and especially when it doesn’t. But what does cash flow actually mean and why do people talk about it so much?

People talk about cash flow because a lack of it is the number one reason businesses die. It’s like some terrible disease (or virus.. COVID anyone?), that nobody’s found a cure for. Sure, there are treatments (like a short-term loan), but these only manage the symptoms without treating the cause.

The thing about cash flow is that, unlike a disease, it can also be the fuel that powers your business to new heights.

So what does cash flow actually mean? Simply understood, cash flow is the payment of invoices. I’ll say that again, real slow, because it’s important and because it points to the root cause of the problem:

Cash flow is the payment of invoices.

Take note of one very important word in that definition: PAYMENT

So, we know cash flow is about the payment of invoices and, if left unchecked, can be terminal for an SMB. But how does almost every SMB find themselves in a bind when it comes to managing cash flow?

The answer is remarkably simple. First, SMBs provide interest-free trading terms to their customers (catching the disease), which means they have to complete the job and wait to be paid (suffering from the disease). And because they’re good at their job, word gets around and they take on new customers and grow. However, that growth only drives a wider gap between the cash needed to fund their business and when they get paid (the disease sets in and becomes chronic).

Clearly it’s the payment (or non-payment) of invoices that drives all sorts of cash flow pain. That means the only cure is invoice payments. Not financing invoices or borrowing money. Those are just short-term tools to manage the symptoms – they do not cure the problem or prevent it from occurring in the first place.

You’re probably asking yourself, with so many advancements in modern technology, why hasn’t this SMB cash flow problem been solved!?

Good question. And good news. It has!

Marmalade is an invoice payments platform designed specifically to solve the administrative complexity that invoices bring and the cash flow challenge they create. In addition to keeping track of all your invoices, scheduling reminders for those that fall overdue, and reconciling payments, our technology empowers SMBs with a new tool to manage their payments.

It’s called Payment on Demand.

With Payment on Demand, Marmalade ensures the full value of your invoices are paid when you want them to be paid, without charging any ongoing fees, interest or other penalties if the invoice is paid late or not at all. Because Marmalade is not a lender. It’s very simple and transparent – when you cash-in an invoice, a receivable is converted to cash (sorry for the accounting speak), and your business can move forward in a stronger position than before.

Marmalade not only protects your business from the cash flow disease caused by trade credit, it also gives you fuel to grow, all while improving your business’s financial strength. Again, compare this to the countless tools peddled by the finance industry to manage the symptoms of cash flow stress (I’m looking at you overdraft facility, credit cards, cash flow loan, short term loan, line of credit, debtor finance… yada yada… if you squint your eyes, they’re all the same) and you can see why Marmalade is in a league of its own.

Now you might be asking yourself, if the problem always starts with invoice payments, why do we only hear about cash flow and never about invoice payments?

Another great question, thank you.

There are two reasons why cash flow is trumpeted by the finance industry. Firstly, until now, there hasn’t been such a thing as an invoice payment platform. SMBs have been left completely alone to manage their own payments, collections and reconciliations. Sure there are apps here and there that provide automated reminders, and other bits and pieces relating to managing workflows, but to date, there has not been a service that will pay your invoice. When you want it. When you need it. Solving the cause of cash flow pain, for good.

The second reason is an extension of the first. Because the finance industry has not developed a service that addresses the root cause of cash flow stress, they can use vague terms, like “cash flow”, to sell many different types of (poorly suited) products. As we’ve discussed, these products just defer the problem into the future and charge you fees and interest along the way. They are a bandaid that do nothing to prevent or cure the direct cause of cash flow stress – invoice payments. In fact, they often compromise the financial strength and stability of SMBs, potentially even accelerating their decline.

Don’t get me wrong, borrowing money is not always bad, as long as it’s being used to fund the right thing. For example, if you have a manufacturing plant and want to expand your production by purchasing long-term fixed assets, then go ahead and grab that loan. If your team is mobile and you need to purchase an additional vehicle, then it probably makes sense to finance that vehicle. But if you’re trying to bridge the gap between an invoice being paid and purchasing inventory for your next job, making payroll, or any other operating expense that pops up on a daily basis, then using debt adds risk into your business, reducing the reserves available to withstand dry spells or unforeseen conditions.

The bottom line? Let’s call a spade a spade and talk about invoice payments, not cash flow, when we’re balancing short-term operating expenses with available cash on hand.

That way, SMBs will have clarity over the problem and will be able to pick the best solution to ensure they can manage their invoice payments (and cash flow) in a manner that leaves them in a stronger position.

Managing invoice payments without anyone in your corner sucks. And until Marmalade, there has been nobody in your corner. Now, by using our free invoice payment platform, Marmalade gives you the support you need to ensure invoices are paid and cash flows.