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The truth is your business cannot survive if you cannot manage your cash flow. Over 80 percent of startups and small businesses fail due to poor cash flow management. So this means that even if you have a profitable company and have a great business model, you need to focus on the cash flow of your company to avoid putting your business in danger.
The following are the most common cash flow problems that small businesses have:
Overestimating Future Sales Volumes
Being optimistic is a great trait to have for a new business owner. However, letting it compromise your objectivity can be dangerous to your cash flow.
It is important to complete objective and realistic sales forecasting based on historical evidence and real numbers. By applying quantitative forecasting methods, you can use actual data from past revenue from your own business or other businesses in your industry as a basis for tracking trends and predicting future sales. This information will help you come up with realistic future sales projections.
Consider working a business mentor who can help you project future sales if needed. They can even offer historical sales figures from their personal experience to help you predict upcoming sales volumes. No matter which method you select, make sure to base your future sales expectations on objective facts and sound judgment.
Poor Debt Management
If you have any debt, you need to know why and how you can fix this. Some types of debt are more expensive than others, perhaps taking out a business loan would be a more inexpensive debt management solution if you cannot currently achieve the ideal of meeting expenses from revenues.
If existing loans are the root of your debt management problem, you may be able to get a consolidation loan or renegotiate your current loan terms. Or perhaps you have assets that can be sold so you can pay off some or all of your debt.
Being Passive About Unpaid Invoices
One of the fastest cash flow killers comes from unpaid invoices from clients. If you are not being proactive about collecting payments from your clients, you could be on your way to a dangerous cash-flow situation.
Small businesses that do not have solid late-payment penalties and collections policies in place are often taken advantage of. If your clients don’t know for sure that they’ll hear from you the moment a payment is late, you’re sure to be the last of their vendors to get paid.
Make sure that you set clear policies with your customers about penalties and the consequences that will arise if they payments are late. Good policies include a 5 percent late penalty after five days. Create a timeline of procedures for when you will send the invoice when payment reminders will go out and when you will make phone calls or stop services if past invoices are not paid.
Not Having Cash
To safeguard your business from cash-flow issues, maintain an account balance equivalent to at least two months of operating expenses. That way, even if you experience unexpected stalls to cash flow, you have reserves in place to protect yourself.
Poor Inventory Control
Inventory can affect your cash flow because it is tied with your business’s cash. If your products do not get sold and just stored away in the warehouse, you can end up having to write it off or discount it which will cause you to lose money either way.
To avoid this, finding the right inventory control balance between how much your company needs to meet the customer demand and how long it will take suppliers to fill orders last minute is tricky but doable.
The Bottom Line
One of the greatest challenges of owning a business is cash flow issues. However, if you stay objective about your business, you will be well on your way to success.
