A look at how cash flow problems occur and how to resolve them.
Did you know that poor cash flow is one of the top reasons that companies fail within the first few years of starting? Failing to properly manage and balance the money coming in and going out of their business on a regular basis, they run out of the cash necessary to operate and essentially have to shut down.
Though there are a number of reasons cash flow problems occur, learning from the mistakes of others and safeguarding your company finances can reduce the likelihood of things going wrong in your business. Here is a look at some of the common cash flow problems businesses face and ways to handle them:
One of the biggest issues that companies face is receiving late payments from their clients or customers. When a business opts to bill or invoice their customers for products or services rendered, they are essentially doing so with the anticipation of being paid in a timely fashion. Unfortunately, this isn’t always the case. Invoices go unpaid for weeks and even months at a time. If this happens on a consistent basis or with multiple clients, it can tie up accounts receiveable leaving you without free cash to cover what is needed to operate your business.
There are several solutions recommended for handling late payments. Sending out invoices in a timely fashion, providing reminders in the days leading up to the due date, and offering incentives for early payments have all proven to work well. Another option would be to utilize SCF finance also known as supplier chain finance or reverse factoring solutions. It is a financial solution for suppliers to have qualified invoices paid immediately instead of having to wait until the due date. With very low fees and no interest, it is an essential way to get the cash you need now so that your business can continue to function until invoices have been paid.
Too Much Spending
Though it’s true you have to invest in your business if you want to generate revenue, buying too much too soon can cause cash flow issues. To keep your spending under control, it is ideal to have an expense limit for things you need to operate. Divide all of your company needs into categories and determine a dollar amount you’re allowed to spend each month and stick to those limits. To stretch your budget further, find ways to save on things you’re spending the most on. Streamlining processes, outsourcing instead of hiring in-house staff, comparison shopping for equipment and supplies, and more can help your business save more so you can invest more in what matters most.
Not Having a Nest Egg
Just as it is important to have a nest egg or emergency fund in your personal finances, the same is ideal for your business. You never know what could happen in a given month that could slow down operations. If an item doesn’t sell as great as you thought it would, there’s a major repair that needs to be done on the commercial property, or if important equipment breaks down and needs to be replaced, you need to have the cash on hand to deal with the matter right away. If you’ve been operating with no financial cushion, however, an unexpected circumstance such as these could throw your budget way off.
When generating a profit, it is imperative to put some of that money aside in a savings account for a rainy day or unexpected event. Try to save at least three to six month’s worth of monthly expenses in an account only to be used when necessary.
Too Much Inventory
Though it’s great to be optimistic about future sales within your business, being too hopeful could cost you big time. All too often, novice entrepreneurs make outlandish predictions as it pertains to inventory. They order more products than they need and when they don’t sell as fast as they projected, this slows down cash flow. Essentially, they’ve spent all this money on products that are sitting in storage (or a warehouse) collecting dust.
Investing in a point of sale system can help you to keep track of inventory, conduct cash flow forecasts, and generate other financial predictions to help you determine how much of what should be ordered. If you already have too much inventory, getting rid of it is as simple as marking prices down to encourage consumers to make more purchases.
Cash keeps your business afloat. If you’ve got too much cash going out and not enough coming in, eventually, your business will fail. To keep this from happening to your company, be sure to utilize the resources and implement the practices discussed above to keep positive cash flow at all times.