Increased competition, the demands of keeping up with technological change and managing the complexities of cash flow can all take a toll on businesses, resulting in many struggling to keep a healthy bottom line. Let’s look at five reasons businesses run out of money and how they can be avoided or prevented.
1. Miscalculating Your Profit Margin
One of the fundamental calculations that businesses get wrong is having the cost of goods too high in relation to the final cost of sales, making their profit margin too small to make the business commercially viable in the long run. Getting wholesale pricing right can further add complexity to the overall mark-up, especially if the initial cost of goods is too high.
From the outset, it is vital businesses develop a solid business plan and have an independent third party analyse their percentage mark-ups and profit expectations so the calculations promote a healthy bottom line from the outset. Businesses also need to be aware of how inflation and changing supplier demands may impact the future cost of goods and their pricing to maintain sustainable growth.
2. Overinvesting in Digital Marketing
While it is important to have an effective digital marketing strategy and automated engagement methods, without a considered digital marketing plan the budget can run away from you without producing any ROI.
According to a report produced by Deloitte, only 16% of SMB’s are making the most of the web with high digital engagement. Instead of jumping on digital marketing all at once, consider what channels will be most effective for your business. It is essential to shop around for the most cost-effective and simple automation tools, loyalty programs and content marketing strategies to provide the most engaging customer experience and drive sales, without draining the company’s financial resources.
For startups, there are so many free or low-budget CRM tools, newsletter templates and marketing analytics tools on the market. This means businesses starting out can be savvier in terms of where they spend their money on marketing, and not run out of cash too early.
3. Prioritising Sales over Invoicing
A common pitfall that drains a company’s cash resources is focusing too much on lead generation and sales, with less effort on the invoice payment, follow-ups and debt recovery. Companies need to allocate adequate resources to both sales management and invoice and account administration, or risk running out of cash quickly. Investing in a strong CRM tool and accounts management software can help streamline the processes to ensure invoices are paid and managed smoothly and efficiently.
4. Failing to Adapt to Market Changes
As market expectations change, especially in industries such as retail and e-commerce, companies that are agile and adapt to customer needs stay on top, while those that fail to adapt lose engagement with their customers and fall behind. Investing in the right e-commerce tools, efficient digital payment methods, inventory management tools and cash-flow systems can ensure your business is digitally savvy to maintain its efficiency as technology evolves.
Many new and established companies fall into the trap of losing track of expenditure, only to be rudely awakened come end of quarter when they realise they are operating in deficit. On top of this, failing to keep track of small, incremental changes like supplier price increases or capital expenditure changes can see even the most established companies run out of money fast. Cloud-based accounting software is an invaluable investment for companies serious about staying afloat.
Consider trialling QuickBooks Online for free and start getting your books in order.
Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.