Cash flow problems are a common cause of small business failures because small businesses are usually more vulnerable to financial problems. One of the best ways to help ensure the success of your business is to manage and monitor your cash flow carefully, so you can quickly take action to prevent or correct a potential cash flow crunch.
Common Causes of Cash Flow Problems
Some of the most common causes of cash flow problems are slow collections from customers or clients, overspending in pursuit of expanding your business, and unexpected expenses. Temporary seasonal or market downturns in revenue can also cause cash flow problems in a small business.
Tighten up Collections
A cash flow problem can arise if your business needs to spend money early in the month while most of your payments from customers or clients don’t arrive until near the end of the month. You can easily address this potential imbalance by tightening up your collections. Consider sending out bills more quickly and shortening your payment terms. For example, you could change your standard payment terms from net 30 days to net 15 days, so you can get money twice as fast.
You should also establish clear procedures for collecting overdue accounts. Even if you just have one or two customers who fall behind in paying you, they can create serious cash flow problems for your business.
Budget with a Safety Margin
It’s financially safer to overestimate the expenses of operating your small business than to underestimate them. Unexpected expenses arise for businesses just like they sometimes do in your personal life, and you can protect yourself in the same way by having a financial safety cushion built into your budget.
Try to think ahead about possible extra expenses that might arise and about possible revenue dips. For example, you might think about what it would cost you to replace an essential piece of machinery that breaks down or how much your sales revenues might dip if one of your best salespeople leaves.
Expand Your Business Carefully
One of the most common causes of small business failures is financial problems that result from trying to expand the business too quickly. Some business owners see their revenues rise rapidly early on, when they’re continually expanding their customer base. They make the mistake of assuming that revenues will continue to rise at a rapid pace and plan for expansion based on that assumption, only to see revenues unexpectedly flatten out for at least a period of time.
Like any business owner, you want to grow your business as rapidly as possible. When you’re planning business expansions such as adding staff, new product lines, or expanding locations make sure you’re reasonably sure that you’ll have more than enough income to fund the expansion.
Monitor Your Cash Flow Carefully
To avoid cash flow problems, monitor your cash flow position carefully and regularly. Review cash flow statements at least monthly.
Improve your cash flow position by cutting expenses. Once your business is well-established, you may be able to negotiate better prices from suppliers if you’re ordering more supplies or ordering more frequently. Consider keeping expenses down by leasing equipment rather than buying it. If interest rates decline significantly, explore the possibility of refinancing company debt at more favorable terms.
Careful financial management is crucial to the success of your business, and careful cash flow management is the first step in keeping your business financially sound.