A company is only as healthy as the cash flow it projects. There are a variety of reasons why the cash flow of a company might suffer. Unforeseen expenses, business expansion, natural disasters, or customer orders drying up at a specific time of the year can be just a few reasons that hamper this process.
In scenarios like these, the priority for the small business owner immediately becomes accessing enough funding to keep his business going. Getting this capital will often depend on the industry he works in, his credit history and professional reputation.
Here are a few situations that can adversely affect the cash flow in your business.
Income Does Not Match up to Expenses – Small businesses often operate at a loss for the first couple of years. However, if a business is more than three years old and still operating at a loss it merits careful examination of where the money is being spent.
The Pricing Is Too Low – Many small business owners, in the hope of being competitive, price their products or services too close to their costs. While this may increase the demand for your product or service, it can be harmful in the long haul and affect your profit margins. You may reflect good sales, but it can make meeting your expenses more difficult.
High Overhead Expenses – Expenses like utilities, telephone, rent, etc. are inevitable in a business, but any more of these than absolutely necessary will eat into your cash flow. These expenses are regular and will affect your cash flow every day until a solution is reached. Audit your expenses and cut back where you think necessary. Try and find cheaper options to work with instead of top of the line solutions that can cost more.
Delayed or Stalled Payments – A small business usually has to offer a thirty to sixty day period for payment to clients. But small companies, when left to wait for the payments for too long, can get in a fix because of a lack of liquidity. This can stop your business from growing quickly and can often spell doom if this practice is sustained. You can try and provide your clients incentives to pay faster or easier payment options. Try and use invoice factoring to finance slow paying invoices, this can instantly help your cash flow.
Badly Managed Books – Having a sound bookkeeping method can ensure that you are on top of your receivables and not gathering up red letters. Use an online accounting system that can constantly keep you updated on your outstanding payments and dues. Having a good accounting system can help you generate reports that will enable you to forecast cash flow and prepare for contingencies.
Taking on a Big Project – In situations where you have a large client which involves you, the owner of the company, to make investments before the payment is made there are chances of stretching your finances too thin. It is a good practice to take a certain amount of the payment in advance so as to ease your burden. Growing quickly is good for any business, but it brings with it the risk of messing up your cash flow if not done right.
Early Payment of Bills – Pay the bills by their due date, but try and pay them as close to the last date of payment as possible. This will help ensure that the money stays with you for that much longer.
Having an Excess Inventory – If your business is in manufacturing or deals with products make sure that you do not purchase more materials than you need. If these products end up just sitting on the shelves or warehouse, it ties up your cash flow. Stock items for the shortest period of time possible and avoid having an excess inventory.
Have a keen eye on your volume, sales forecasts, available cash and supplier capabilities, not having important products can lose you clients. If you deal in large orders use purchase order financing for sales that exceed your cash flow capabilities. This can vastly improve your cash flow and allow you to finance the supplier expenses.
Cash flow hiccups can be averted by some smart planning at your end. In fact, there is no such thing as too much planning when it comes to running a business smoothly. Have in place a contingency plan for everything that can go wrong in order to ensure you remain on top of any (unwelcome) developments, and so that your business does not suffer.
Author: Joshua Geary is a financial writer and experienced blogger and regularly writes for Sunwest Trust, Inc. When he’s not writing about self direct IRAs and the Do’s and Don’t’s associated with them, Joshua enjoys reading, CrossFit and swimming in his leisure time.
Published: October 17, 2014