Many small business owners fail to recognize the importance of their company’s cash flow. Money in the bank is not an indication of a healthy business. It’s actually cash flow issues that often put companies out of business – even companies that are otherwise successful.
The underlying problem of many cash flow problems is poor, unorganized bookkeeping and record keeping. This is typically most problematic with invoicing issues and poor records of customer dues and payments. Without accurate, up-to-date records, you have no knowledge of cash flowing in and out of your business.
What five cash flow issues are most deadly to your business?
- Unpaid Customer Debts
Few problems are as crippling to your business as providing services to customers and never being paid for your work. In most cases, businesses that suffer from this issue don’t have streamlined receivables processes – from invoicing to collecting. But this process must be a priority.
For many owners, it’s uncomfortable to ask customers for payments, even after already completing the work. But think about this: If you generate $500,000 in sales this year, but fail to collect 5% of your customer payments, you’re losing $25,000 of money you “earned.” Is avoiding your discomfort worth tens of thousands of dollars?
Reduce this risk by creating a process to track your receivables. Also, consider asking customers to make deposits before you begin significant work, or break customer payments down into several smaller payments.
- Mismatched Pricing And Expenses
When you first opened your business and determined your pricing, did you have a true sense of how much you needed to charge to turn a profit? In most cases, owners set prices too low. Compounding the problem is that many owners also fail to raise their prices over time to match increased supply costs or other rising expenses. Their profitability is getting squeezed.
Another common issue is that owners have expenses that are unnecessary and restricting their cash flow. Are there expenses you can eliminate?
What about expenses that are far too costly than they should be? Can you negotiate better prices with your suppliers? Are overhead expenses such as rent and utilities stifling your cash flow?
Work with your accountant or small business advisor to verify that your prices are in line with your costs, ensuring healthy cash flow and profitability.
- Mismatching Payment Periods
If you ask customers to pay within 30 days, but are expected to pay suppliers within 14 days, you’re bound to have negative cash flow. In all likelihood, this will build up over time and become increasingly suffocating.
In the least, you want your customers to pay you for your goods or services on the same timetable as you’re expected to pay your suppliers. This way, you have enough cash coming in to pay your suppliers when you need inventory.
Just as suppliers commonly offer 2% discounts if you pay within 10 days, consider offering similar discounts to your customers to encourage them to pay more quickly.
- Too much inventory
When you use your cash to stock up on inventory, you have the expectation that you’ll sell these products. But what if you have too much inventory and/or can’t sell all of it? Especially if such products are perishable (such as food or beverages), inventory that will never bring in the cash inflow you expected is a complete waste.
These wasted expenses are incredibly costly, as you can imagine, and proper inventory planning is an absolute necessity to ensure your operating costs are generating revenues.
- Overinvestment In Growing Your Business
Most business owners want to grow their companies, but many fail because they do so too quickly and run out of cash to fund their essential operating expenses.
Buying additional pieces of equipment and hiring new employees are often necessities for growing companies. But making such purchases too soon or bringing on too many new team members too quickly (without enough revenue to pay for such expenses) leaves little money left over to pay your suppliers and employees while also affording other critical expenses.
Steer Clear Of Cash Flow Issues By Making Estimates
Making cash flow estimates is critical to ensuring your financial health. If you know which months you expect to be short on cash, you can prepare by using the months in which you have great cash inflow. You’re able to set money aside as a cushion during tighter months. Your estimates will also be critical to determining how quickly you can grow (how much additional cash you can afford to spend).
With estimates (and comparisons to actual cash flows), you or your small business advisor can identify cash flow issues, address them before they become too severe to fix and plan for your future.