Small businesses may be hit hard by financial problems due to lack of working capital. Managing and monitoring your cash flow carefully can help you ensure you have enough operating reserves, and lets you take corrective action when faced with a cash flow crunch. That proactive approach can help your business thrive when other businesses fail due to lack of cash flow.
Common Causes of Cash Flow Problems
Why are small businesses susceptible to problems with cash flow? The causes of cash flow problems can be as different as your business, including slow collections processes, overspending on business supplies, expansions that happen too soon, and unexpected expenses. Temporary seasonal downturns in revenue can also cause cash flow problems in a small business if you’re not prepared. Knowing the cause of your cash flow problems can help you avoid or correct them early.
Tighten Your Collections Process
Extending credit to your customers gives them more flexibility to spend now and pay later, which may boost your sales. But that also means you’re waiting longer to collect the cash for the goods or services you sell. If that money doesn’t come in for several weeks or months, you may find yourself with a cash flow problem. Sometimes that might mean you need to spend money early in the month, while most of your payments from clients don’t come in until the end of the month. Or maybe customers push the due date, often paying late, which leaves you waiting on the cash you need to run your business.
Tightening up your collections process can address those cash flow imbalances and late payments. Consider sending out bills more quickly and shortening your invoice 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. Giving customers a small discount for paying early may also motivate them to send in their payments faster.
Establishing clear procedures for collecting overdue accounts also reduces cash problems. Even if you just have one or two customers who fall behind in paying you, they slow your cash flow, which can affect your ability to pay your obligations. Setting reminders as the due date approaches and notices after a due date passes can be enough to get customers to pay. You may also add late fees or penalties for missing the due date. If you have a manual collection process, it may be time to explore online accounting software like QuickBooks that can automatically print invoices, age accounts, and add fees where necessary.
Budget with a Safety Margin
No matter how well you budget, you may face unexpected operating expenses in your business. Overestimating your operating expenses gives you a buffer to account for those unexpected bills, so you can still pay them without throwing off your entire 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 your top salesperson leaves. Consider expenses that only happen occasionally or once a year, such as licence renewals or membership fees for professional organizations. Adding those potential occasional expenses into your small business budget and establishing a reserve fund you can tap when they occur helps you avoid a cash flow problem.
Expand Your Business Carefully
Expanding your business too quickly or too soon can cause financial strain. Some business owners see their revenues rise rapidly early on when they’re continually expanding their customer base. They may make the mistake of assuming that revenues always continue to rise at the same pace and plan for expansion based on that assumption, only to see revenues unexpectedly flatten out.
Like any business owner, you want to grow your business as rapidly as possible. When you’re planning business expansions, such as adding staff, developing new product lines, or expanding locations, make sure you have solid financial projections to support those moves. If you notice demand for your goods or services increasing, it’s a good idea to make sure you have the infrastructure to handle that increased demand before you continue accepting more orders. It’s tough to turn down business, but sustainable growth gives you more stability for the future. If you take out a business loan to fund expansion, be sure you’ll earn enough revenue to repay it.
Monitor Your Cash Flow Carefully
Monitoring your cash flow position carefully and regularly helps ensure you have enough cash coming in to cover your expenses. You also spot potential issues before they cause major financial trouble, so you can take action. Reviewing your cash flow statements at least monthly helps with this monitoring.
You can 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, you might explore refinancing company debt at more favourable 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. Using tools such as QuickBooks simplifies the process. Improve your cash flow with invoices, payments, and expense tracking. See how much cash you have on hand with QuickBooks.
Information, ideas and opinions expressed on this website should not be regarded as professional advice or our official opinion and you are strongly advised to consult your professional advisor before taking any course of action related to them. Each financial situation is different, the advice provided is intended to be general, and such such, you are advised to consult your financial or legal advisors for information specific to your situation. The information contained in this website is provided ‘as is’ and your use of and reliance on the information is entirely at your own risk.