Regardless of how profitable a business is, one of the most important things you need to do, is maintain a healthy cash flow.
There will always be unforeseen expenses that crop up now and again; but clear, continuous financial forecasting can help to minimise these risks. If you don’t plan, then cash flow issues could creep up on you when you least expect it.
Four out of ten small businesses fail within the first five years, with poor cash flow cited as a major factor. Despite this, cash issues can strike at any time. Here, we take a look at the five most common reasons for this, and show you how to resolve them; reducing the impact felt by your business.
Late Payments From Customers
Many businesses will offer a variety of payment options to customers, but that means if they don’t pay on time – or worse, at all – you’re the one who’s negatively impacted.
Even when you’re waiting for payment, whilst theoretically you may have the money, physically you don’t.
There is no other way around this, other than following up late payments – no matter how much you dislike chasing. You need to stay on top, so you can get the money you are owed. Our debt management software can help to identify potential credit risks, process regular debt chasing tasks, and spot potential debt patterns. Combined, these tasks will help to reduce the impact felt by your business if (or unfortunately, when) a customer goes outside their payment terms.
Super Fast Growth
If your business experiences great success early on, it can be so tempting to build on this, and invest on taking your business to the next level. However, hiring new staff, renting out a larger warehouse space, or drastically increasing your inventory all costs money. And if your business doesn’t continue to grow as quickly as you envisioned, you could be spending money you don’t have.
The solution? Try to resist the temptation of getting too carried away. Instead, forecast and do your research into future trends. Any decision you take regarding your business should be educated. If an item is selling particularly well, you may decide to increase numbers, or try expanding into a new market. However, you don’t want to invest money in several areas all at once.
Of course, you don’t want to fall on the other end of the spectrum: for every business who jumps the gun when they see an increase in sales, is another one who sits back and lets the opportunity pass them by.
The key is to find the middle ground. Investing revenue in your business can be good long-term, but you need to think about the short-term, and maintain a healthy cash flow.
Poor Accounting Skills
No matter how meticulous you are; if you manually create your own spreadsheets and reports, there’s bound to be a mistake at some point down the line.
Even the smallest mistake can send your whole finances off track if you make decisions based on the wrong figures.
The solution? Don’t rely on manual accounting because unfortunately, there will always be a degree of human error. Our accounting software will update your financials every time a sale is made, and keeps track of refunds, exchanges and VAT.
Having real-time access to correct financial data will allow you to make educated decisions, and help to reduce the chance of you falling into cash flow issues.
Too Much Inventory
You want to have a degree of inventory, so that customers aren’t frustrated when they find out the product they’ve ordered is out of stock. However, inventory directly affects your cash flow, because until your products sell, your cash is tied into it.
This is why forecasting and reporting is so important: is there a particular item that sells really well? In that case, you may want to have more of them in stock. At the same time, another product may not be shifting, so there’s no point in investing more money in it – otherwise, they’ll just be sitting in your warehouse taking up more space, eating up your money.
It’s crucial you have accurate information on your stock levels, so you can see how much of your inventory has been sold, what’s on order, and what’s free to sell. The other alternative you may decide to look at, is drop shipping: with no physical inventory, you’ll contact suppliers directly when a sale is made.
Your Business Just Isn’t Profitable
The fact is, a business can make a profit but have cash flow issues if their revenue is tied up elsewhere. However, one common cause of a cash flow problem in the first place, is that the business isn’t profitable to begin with.
Without a profit, you won’t have a sustainable source of revenue that you can continue to invest in your business.
The thing you need to consider, is how you are going to make a profit. This doesn’t just extend to an increase in sales – it could be that your rent is incredibly high, and you may look to move elsewhere. Perhaps there’s an opportunity to ask your suppliers for discounts if you buy in bulk? An increase in profits can help make your cash flow healthier, reducing financial worries.
To conclude, cash flow issues are an inevitable part of running a business; but knowledge and forecasting can help to lessen the blow. There are many causes of cash problems, but these five are just some of the most common. Our cloud ERP software can help you to manage your business more effectively, providing you with the real-time information needed to make educated financial decisions. For more information, give us a call on 0845 544 3032, and we’ll be happy to answer any questions you may have.