Growth can bring problems to a business which comes surprising to many entrepreneurs because they think that all growth is good. But growing sales too quickly, or getting a single very large order, can create serious cash flow problems. These problems can cause permanent damage to your business if they are serious enough.
In this article we will discuss the two most common cash flow problems that occurs due to growth. We are also going to address how to solve these problems.
Problem #1: You sign up more clients, who pay in 30 to 60 days
Most business to business sales are made on net 30 to net 60 day terms. Companies spend money to deliver their product or service and then wait one or tow months to get paid. The problem is that suppliers and other expenses need to be paid quickly. Payment is either due upon receipt or when the month is over. This can escalate cash flow problems quickly.
Many business owners typically focus on growing the revenue but may not notice the serious cash flow problems until it is too late.
This problem can be solved by creating a cash reserve to handle the initial deficit. Alternatively, consider providing clients with an incentive to pay sooner. Offering a 2% discount in exchange for a quick payment can often improve your collections dramatically and eliminate any deficits.
If these options do not work, consider factoring invoices to smooth out your cash flow until the number is positive. Factoring provides you with immediate funds to finance slow-paying invoices. This improves your cash flow and allows you to pay expenses and grow.
Problem #2: You get increasing orders or a very large order
This problem is similar to the one above but usually affects resellers and wholesalers. Small companies with a portfolio of successful products soon start growing quickly. This growth can be exponential and lead to very large orders. The problem is that these orders often exceed the capital capabilities of the business.
Companies often work with commercial or government clients that pay in 30 to 60 days. However, many wholesalers also work with product suppliers who demand payment upon delivery or, worse, a prepayment.
They need to pay for the goods and wait 30 to 60 days for the goods to be delivered. They must wait another 30 to 60 days to get paid by clients once they get delivered.
Long and growing cash flow cycles can create serious problems. Unless the problems are fixed, you may have to decline orders. This situation can affect client relationships and lead to loss of business.
To solve this problem, you can get payment terms from your suppliers while asking your clients to pay quickly. It could be hard to balance but clients could decide to pay slowly, or suppliers could demand faster payments. If this happens, you will be back to where you originally started.
If you cannot invest additional funds into your business to handle large orders, consider purchase order financing. This type of financing proves you with funds to cover supplier expenses. It allows you to complete the order and book the revenues.
How to Fix Cash Flow Problems in a Small Business
Having cash flow problems requires some changes because they will not just go away on their own. Some solutions to help you tackle these problems include the following:
- Create a cash flow budget – this will help you see how much is flowing in and out of your business during a specific period of time. You will be able to see which months you can expect to see a deficit and surplus.
- Make it easy to get paid – try online invoicing so that it makes easy to send invoices and get paid all online.
- Cut expenses – if you are not paying attention to your expenses, you might be overspending on them. Find out what can be cut and remove anything unnecessary.