One of the biggest challenges facing all businesses is to establish efficient cash flow. In fact, it is such an essential issue that 82% of companies that fail do so as a result of cash flow problems. Let’s look at some of the most common cash flow problems that face almost all businesses and how you can overcome them.
What is Cash Flow?
Cash flow is a way of understanding the funds that are coming in and going out of your business.
Money comes into the business from your clients and customers who are paying for the services or products you provide.
Funds leave the company for expenses such as loan payments, accounts payable, and rent.
Positive cash flow means that your business has funds to clear all expenditures and continue to provide more goods and services, increasing value for the business owners. However, negative cash flow means that your company has or will soon run out of money. This is a fatal situation for most businesses.
So, what causes a negative cash flow? Often it is more than one factor, but some of the most important can be identified and fixed before they threaten your business.
Bad Bookkeeping Practices
One of the most insidious, but, at the same time, easy to fix circumstances that can lead to negative cash flow is poor bookkeeping. Neglecting bookkeeping leads to serious and costly financial difficulties that will threaten the continued operation of any business.
However, the solution to lousy bookkeeping is simple – proper bookkeeping. Find an accounting system that you can trust. QuickBooks by Intuit is the standard for most industries. If you can't commit to an accounting system, find someone to manage your books for you. Paying someone for a few hours of work each week could mean the difference between saving and having to close your business.
Not Receiving Payments
Another issue that every business faces is collecting receivables in a timely fashion. If customers are not paying on time, cash flow issues can develop even though you're successfully closing sales. Without the cash that you are owed, you can end up missing your accounts payable obligations, payroll and other bills, jeopardizing the survival of your business.
To avoid this, you need to set clear rules for how and when you are going to be paid from clients. Be persistent in receiving funds and make sure you are keeping careful track of payments that are not coming in.
Most importantly, always make sure that you have enough cash on hand to meet your operational expenses. Careful budgeting is must for every business. And, if necessary, smart and cost effective financing, tailored to fit the specific needs of your business, should be utilized without hesitation.
Too Much Growth
Nothing is more exciting than a business that takes off, and many business owners dream of expanding. However, taking the steps necessary to bring your business to the next level requires an honest and extremely careful assessment before committing to significant growth. Overexpansion can lead to more significant strain on your finances than you might think, and it can cause a negative cash flow that could sink your company.
If you are experiencing a boom, take the time to gain a full understanding of what is happening and why. Try to forecast what the future will bring by researching what trends have staying power. When you decide it's the right time to grow, focus your energy and finances on a limited, conservative plan of expansion rather than trying to do too much too fast.
The day to day costs of running a business can sneak up on new business owners. You may have dedicated your energy to managing the costs of producing goods or providing services, but if you've ignored expenses such as utilities, bills, and rent, you may be in trouble.
To keep costs down, you should perform a thorough audit of your business’ overhead costs. Get all your expenses documented and make sure that there isn’t anything that is bleeding money from the company. Reducing your overhead is easier than you might think and is one of the quickest ways to improve your cash flow.
Business owners in competitive fields are often inclined to offer their services and products at low prices in order to stand out from the competition. This can lead to small or negative margins. In extreme scenarios, businesses may even be offering some services at a loss to attract customers without realizing the harm they are doing to their cash flow.
To fix this issue, you need to look at all your services and products, how much they cost to produce, or provide and identify which ones have poor margins. Raise prices as much as you reasonably can to make sure small margins aren’t causing your company more harm than good. Then set guidelines for how low pricing for each product or service can go to avoid facing this problem in the future.
Understanding the challenges of cash flow for small businesses is an integral part of helping your company prosper. If you're having problems identifying where cash flow issues are occurring in your business, contact us. Cash flow analysis is one of the fundamental studies we perform for each of our clients at Kenmore Capital, and making sure that you have enough funds available to succeed is our paramount goal.