Cash flow problems in small businesses
It’s common that most small businesses will have a cash flow problem at some point; luckily these can largely be prevented with planning and preparation. In this article we’ll run through some of the most common causes of cash flow problems, as well as offering practical advice on how to improve your cash flow.
Causes of cash flow problems
Identifying cash flow problems early on could mean the difference between your business being a success or not. Some of the main causes of cash flow problems include:
Low profits or (worse) losses
Your profits are your major source of cash; if your business is not profitable, you will not be able to cover the cost of all your business expenses. This could lead to you taking out a loan you can’t repay, or worse, your business closing down. Low profits could be for a number of reasons such as; you’re not charging enough for your products or your marketing is not working well.
Too much stock
Having excessive inventory is bad for cash flow, so it’s important to fine-tune your inventory management. You should monitor your inventory carefully to ensure that stock is there for the shortest time possible.
Seasonality
Your business may be affected by seasonality, meaning you might receive more business more months than others. Businesses usually face the greatest costs during their quieter months, so this should always be taken into consideration when deciding how to manage your cash flow.
Poor financial planning
If you don’t create a financial plan and budget beforehand your business is likely to suffer from cash shortages. For example, if your business gives a long payment term to customers but you still have expenses to pay, you’re not going to bring in enough money to cover the costs. No matter what you do you’re always going to be behind, so it’s important to have a robust financial plan in place to prevent this.
High overhead expenses
With prices rising, overheads such as rent, telephone bill, and utilities can get out of hand. To combat this, it’s important to review all these expenses regularly, cut back where possible, and perhaps find cheaper providers.
How to improve cash flow
So now you know some causes of cash flow problems, how can you improve your cash flow? Here are some tips to get you started:
Create a cash flow forecast
A cash flow forecast will give you an estimate of when money will be coming in and out of your business; whilst it’s not exact it allows you anticipate what your cash flow will look like in the future so you can take appropriate action. Your accountant can help you to prepare this and provide insight into areas that you may have overlooked.
Have robust debt recovery procedures
It is vital to any business to have a good debt recovery system. If you’re not receiving money for your goods or services then money is not being injected into your business, which can be catastrophic further down the line. It’s important to stay on top of these debts; the longer they go unpaid the harder they are to collect.
Invoice accurately and promptly
It’s important to get the basics right and make sure your invoicing is accurate and on time. Invoicing errors could mean you get paid late or incorrect amounts resulting in problems for your cash flow.
Credit check customers
It is important to credit check all customers when giving them credit, and it is also a good idea to ask for and check their business references too.
Reduce expenses
As mentioned above, it’s important to keep track of all your expenses. You should only be purchasing business-critical items. For more expensive items, it might be a good idea to look into a payment plan to spread the payment which could free up some extra cash.
Get a good business credit card
Consider getting a good business credit card to pay suppliers and make purchases. The advantage of this is that you have longer to make payments. Some cards also come with cash back features.
Offer incentives for customers to pay faster
Offering a small discount to customers who pay their bill early or charging a penalty for those who are late can help to keep your cash flow on track.
Work with an accountant
Working with an accountant should be seen as an investment rather than an expense. They can help you to anticipate and plan for future cash flow problems, freeing up more of your time and ensuring that there will be no need to worry further down the line.
Need some support?
If you are struggling with cash flow issues and would like some professional advice, please get in contact with us here and we will be happy to help.
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