Healthy cash flow is often the difference between a business that survives or fails. Everything from small business payroll to inventory management to marketing depends on how much funding you have available day-to-day. One financial emergency could trigger a chain reaction of payment problems if you aren’t prepared to deal with unforeseen expenses. The worst thing to do is wait until you need money to start thinking about cash flow management. Make sure you have enough funds in the pipeline to avoid these common financial hurdles.
Slow Payment Collection
Do you have a habit of using up your cash before you secure more income? Roughly 64% of Canadian small businesses have struggled with cash flow issues, according to an Intuit survey with Wakefield Research. And 62% of business owners point to slow payment processing times as a top reason for poor cash flow.
Retailers who sell products to consumers get paid upfront, but it’s common to have longer payment terms when your clients are other businesses. Unfortunately, not all clients pay on time, and the wait is even longer if the funds have to clear with a bank. In the survey, 37% of respondents said they typically wait more than 30 days for payment.
Take this self-employed advice to heart: cash is king. Unlike other assets, such as credit and stocks, cash is the only universal currency. You might look at your invoice numbers and feel safe because you have plenty of receivable payments due in a few weeks. However, sending invoices to your clients isn’t the same as getting paid. Try to prevent payment delays by changing how your cash pipeline is structured.
- Adjust your payment terms – Are you currently using a 30, 45, or 60-day payment cycle? Give buyers a shorter payment window to keep cash flowing into your business more often. Many corporate companies pay all bills on a fixed schedule so you might not be able to renegotiate every contract.
- Accept multiple forms of payment – The more options you provide to clients, the easier it is to get paid quickly. While it’s satisfying to get a cheque in the mail, bank transfers and credit card payments are much faster.
- Charge late fees – Does the fear of losing customers stop you from charging fees? Big mistake. Clients who consistently make late payments are costing you money in the long run. Fees give your clients an incentive to comply with payment terms, and the added funds help to beef up your cash reserves.
- Offer early-payment incentives – Chances are, you have some clients who love to save money. Give them extra motivation to pay early by offering a small discount. Worried about losing income? Roll out a slight price increase to keep your earnings the same while improving cash flow.
Delays in Small Business Payroll
Coming up short on payday is one of the biggest threats to business success. Employees rely on predictable cash flow just as much as you do. Late paychecks undermine trust, cause personal hardship for employees, and drive your workforce to look for jobs elsewhere. An Intuit study found that about 29% of Canadian business owners who have had cash flow issues were unable to pay themselves or their employees at some point. If you can’t compensate employees promptly, you could even face a lawsuit for back pay.
Picture a moving company that doesn’t have enough staff or equipment to complete scheduled jobs. A shrinking workforce is crippling to small businesses that depend on a strong workforce, whether you scale down out of necessity or workers leave on their own. You might have to cut back on the volume of customers you serve. Cancel jobs on short notice. Outsource essential services to subcontractors. Either way, you risk losing income while you scramble to get business operations back on track. Consider using a business online payroll platform to stay on top of funding for employee wages. For example, QuickBooks Online with Payroll can help you manage finances more efficiently by tracking payroll taxes, creating activity reports, and estimating employee-related expenses in advance.
No Budget for Recruitment
Being a nice boss might score you popularity points, but it doesn’t pay employee salaries. It’s extremely difficult to retain and recruit staff if small business payroll delays are an ongoing problem. For one thing, you have to worry about negative feedback showing up on employer review sites like Glassdoor. Current and past employees are the best people to promote your business and attract new talent through word of mouth. You can’t expect employees who aren’t being paid on time to give good referrals. Workers lose confidence in the business and become less engaged in their jobs, which makes your workplace unattractive to other job seekers.
Working for a small business appeals to people who value autonomy, close ties to a community, and accessible leadership. Unfortunately, many small business owners are so focused on keeping the lights on that they put recruitment goals on the back burner. Your finances have to be in good shape to support recruitment costs and enable smart hiring decisions. Otherwise, it’s tempting to hire as cheaply as possible while sacrificing quality. A business that’s already battling cash flow problems has little chance of surviving the financial impact of bad hires. By offering competitive benefits, such as flexible hours and transportation stipends, you can find qualified people to help you grow the business. But it takes consistent cash flow to bring new people on-board and keep them happy.
Overdue Payments to Vendors
A funding fiasco doesn’t just hurt your finances. Your business is part of a broader ecosystem of customers, suppliers, distributors, and service providers who are affected when you can’t cover your expenses. Consider the example of a sandwich shop owner who pays for janitorial services and places monthly orders with produce, meat, and restaurant suppliers. She has enough cash to pull through a slow season but loses a big commercial client who routinely orders food for resale in the company cafeteria. Now the owner’s cash reserves are low, and vendor bills are coming due.
With sales slowing down, the shop owner has to prioritize shop utilities and food supplies. She can cancel the janitorial services, but still has an outstanding bill to cover. What happens when her deli supplies and food service containers start running low, and she needs to place another order with the restaurant supplier? The shop owner could try to negotiate payment extensions or temporarily offer fewer menu options to cut food costs. But that might not go over well with regular customers who can’t get the food they want. Figuring out who to pay first becomes a juggling act with late fees piling up on overdue accounts. On top of that, the shop owner might have to skip out on paying herself and let household bills fall behind.
Payment problems can strain your business relationships, making it harder to get the capital or inventory you need when times are tough. And if you don’t get a handle on the situation fast, you may have trouble maintaining or opening accounts with vendors in the future. Think about the size of your cash reserves during a typical month. Do you have enough savings to keep operating for 30 days without additional income? Three months? Six months? A year?
A small business with a lot of moving parts has more opportunity for financial failure. Aim to build a cash safety net that’s at least two to three times greater than your operating costs. If it costs $2,500 a month to run your business, have a minimum of $5,000 to $7,500 readily available at all times. This allows you to fund your business for two to three months when your sales numbers look dismal.
High Debt and Poor Credit
Poor cash flow keeps you chained to credit financing. It’s true. A healthy portfolio of credit is necessary to show lenders that you run a stable business and use good money management practices. But relying too heavily on credit sends your debt skyrocketing while reducing your net income. Even as your business is doing well, you might still have trouble earning enough to live on. With more cash moving in the pipeline, you can pay bills faster and avoid high interest and fees.
Another common pitfall is the habit of carrying balances that are close to your limit. What if you need to fix equipment or buy extra supplies for a profitable project? What if the utility bills for the month turn out to be higher than you expected? A minor increase in business expenses could send you over the credit limit.
Then the penalties start adding up. High balances also prevent you from getting the most cost-efficient terms on loans and credit. Paying with cash encourages you to evaluate and justify each expense. On the other hand, overspending on credit creates the illusion that your income is growing when it’s depleting.
Limited Growth Opportunities
Ever heard the saying, “Your business is dying if it isn’t growing?” Great investment opportunities usually come with a deadline. You need cash to take advantage of time-sensitive investments, such as acquiring another business, buying stock, or setting up distribution partnerships. And if you don’t have the financial flexibility to act now, you could fall further and further behind competitors. Of course, it’s possible to make large purchases with loans. But you need good credit to get funding on short notice, and you have a growing debt liability to worry about.
Start Building a Financial Cushion
Some expenses are predictable. Others aren’t. It takes careful money management to navigate the financial ups and downs of owning a small business. By reviewing your current spending habits, you can identify ways to save money and lay the groundwork for financial wellness. Look for free financial planning tools and self-employed advice from organizations that are invested in the success of small businesses, such as the Canada Business Network and the Business Development Bank of Canada. Outline your top business goals for the next 12 months so you can prioritize tasks that move you closer to funding these objectives.
Tracking your business activity is the most effective way to get a realistic picture of your profit, debt, and expenses. Learn how today.