Cash flow problems are common, but you can avoid them with some forward planning.
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Here’s a rundown of common business cash flow problems, and how to fix them.
What is cash flow?
Let’s start with the most basic question: what is cash flow, anyway?
Cash flow is essentially the way money flows in and out of your company. Money comes in when people pay you for goods and services, and it goes out when you pay debts and expenses. Combined, these figures make up your cash position.
That said, why does cash flow matter? It’s simple:
- It makes your business more stable.
- It’s easier to grow your company, and make repayments on time, if you have cash to hand.
Unsurprisingly, the earlier you spot potential problems, the better.
Recognising cash flow problems
It’s not always easy to recognise potential cash flow problems in your own company, but it’s time to act if you notice these early warning signs:
- You don’t have cash available to pay debts.
- Customers aren’t paying invoices on time.
- You’re buying lots of new inventory, but you don’t have many new orders.
- You miss out on early payment discounts from suppliers because you never have cash to hand.
So, what should you do if you spot these problems in your business? First, you need to identify the root cause. There are four main reasons that cash flow stalls.
1. Poor budgeting
Poor budgeting is a leading cause of the cash flow problems small businesses face. Your budgeting is poor if:
- You don’t negotiate the cost of supplier contracts and other service costs.
- You haven’t accounted for fluctuations in seasonal demand.
- Your bills always fall due before payments come in, and you never have spare cash to hand.
If you don’t manage your business budget, it’s easy to lose control of your cash flow.
2. High startup costs
Starting a business costs money – and often more than you think. Commonly, business owners underestimate how much they’ll actually need to get going.
Always factor in costs associated with:
- Legal fees
And don’t forget about business loans – inflexible payment schedules can disrupt cash flow.
3. Slow payment collection
Sure, when you’re just starting out, you’re trying to build relationships with customers and suppliers. But if you never chase late payments, or you give people too long to pay you, it’s not long before there’s more money going out than there is coming in.
In fact, it only takes a few late payments to damage cash flow.
4. Growing too quickly
Yes, really. Some growth is unsustainable.
If you scale your business too fast, you could end up using all of your spare capital to meet demand. If you don’t recoup that cash quickly, you might start paying out more than you’re bringing in.
Remember, growing a sustainable, thriving company takes time. If you don’t devise a business plan and stick to it, you won’t have the spare cash to keep up.
Cash flow problems: how to avoid them
Although you can fix problems with your cash flow, it’s best to stop them arising in the first place. Here are five strategies for maintaining a healthy cash flow.
1. Use cash flow statements
A statement of cash flow gives you a “snapshot” of your cashflow at any given time. These statements help you identify problems early so you can figure out a solution for the next period.
2. Anticipate future needs
Try to forecast future growth so you have a better idea of how much money you’ll need. You can use cash flow forecasts, which help you project what you’ll spend and earn in a given period.
3. Chase overdue payments
It’s no good making lots of sales if you don’t have any cash to show for them. If invoices fall overdue, always follow up quickly. You should also clarify your payment terms so that customers know exactly when you expect payment.
4. Reduce your accounts payable
The goal is to always have cash available to pay your debts and expenses. So, look for ways to schedule your own repayments around when you’re expecting cash to come in. This might mean negotiating a new payment date with lenders like your business credit card provider.
5. Cut back on expenses
Ultimately, you might need to reduce some expenses to improve your cash flow, at least in the short term. You could start by categorising expenses as ‘essential’ and ‘nonessential’, then cutting back on some nonessentials. For example, maybe you could buy cheaper stationery, or cancel subscriptions for services you don’t use.
Think of fixing your business cash flow like sorting out your personal finances. The more organised you are, the easier it is to take back control. But if you’re unsure how to solve cash flow problems, don’t wait until they get out of hand. Seek professional advice sooner rather than later.
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