Do you struggle to cover your bills every month? Are you caught unprepared for high expenses? These could be symptoms of poor cash flow management. In a report by Reuters, poor management can lead to stress on a business and eventual failure.
Cash flow is the amount of money coming into your business versus the amount going out in a given time frame (week, month, quarter). Positive cash flow is receiving more cash through business activities than is paid out. If you are spending more than is received in a stated time frame, then the result is negative cash flow. Once in a while, this can be absorbed by reserves in the business. But regularly generating negative cash flow can cause businesses to fail.
Positive cash flow is vital to the success of any business. Read our top reasons for poor cash flow and what you can do to improve them in your business.
The first reason most businesses are low on cash is too little in profits. Profits from doing business are the most immediate source of cash in a company. If you are not reaching quality customers or are undercharging for your products, you are leaving money on the table.
Reevaluate your marketing efforts. Find out what is working and what you can cut out. Investigate new marketing tactics for your industry and focus on one or two to implement in your business plan. Align your pricing structure to remain competitive in your market. Consider a sliding pricing scale to attract new customers.
Steady income makes it simple to plan revenue and expenditure outlays, but not all businesses can rely on a regular income. In August of 2019, JPMorgan Chase Institute released findings indicating three significant reasons for irregular cash flow: erratic timing, volatile expenses, and sporadic revenues. Sometimes these can be anticipated, such as payment on a big contract, or they can be random, such as emergency equipment repair or replacement.
Sometimes it is necessary to secure short-term funding to cover cash flow deficits. Know your possible funding sources before you need them. Establishing a line-of-credit with your bank or other external funding source now can help cover future costs.
Investing in and growing your business would seem to lead to higher profits, but this is not always the case. Cash shortages result from having insufficient savings to cover the cost of increased outputs while waiting for increased revenue.
Plan for all future growth and ensure you have enough reserves. Forecast how long it will take to make a profit and have sufficient cash reserves to cover the period where spending outstrips income.
While inventory on hand is necessary for timely shipment of products, having too much can negatively impact your cash reserves. Storage costs increase, and this can also lead to waste if inventory expires or becomes otherwise unsaleable.
Ensure you have enough inventory on hand to cover projected sales without keeping a large backstock. Record and monitor inventory for use dates and timeliness.
Late payments are a major source of cash flow strain for businesses and a source of stress for business owners. They force your business to pay expenses before receiving revenues, keeping you short on cash. Sometimes, late payments are unavoidable, but other times they can be deliberate on your client’s part.
Make it as easy as possible for your clients to pay you on-time. Research what forms of payment are most widely used by your customers. Accept multiple methods of payment, such as ACH or credit card processing. By making it easier for clients to pay, they will have a greater incentive to pay on-time. If none of those tactics work, there are some lending options like invoice factoring that will buy your invoices from you (for a fee) to help improve your cash flow.
Without having a grasp of what a typical month looks like as far as income and expenditures, it is difficult to predict the future. Constantly reacting to funding situations takes time away from your profit creation activities.
Get ahead of possible cash flow problems by creating a cash flow statement. According to SCORE, a 12-month cash flow statement is a vital business document. By predicting when volatile revenue or expenditures will occur is key to planning and having enough cash on hand to cover large outputs. Plan cash flow 12 months in advance and update forecasts regularly.
Prioritize cash flow management to keep your business healthy and prepared for unexpected downturns in revenue or increased expenditures. Being aware of cash flow patterns in your business, predicting changes, and accelerating payments on accounts receivable can alleviate most chronic cash flow problems.