Healthy, positive cash flow is the pathway to achieving financial success. It’s undeniable that your business needs to generate enough cash to allow you the freedom you deserve. Therefore, your business’s cash flow should always be your priority in financial terms.
Having said that, a smart business owner (You!) needs to be aware of the potential problems that may jeopardise the financial stability of the business. Knowing the pain points helps you avoid them or recognise and solve them quickly.
Here are the five most common reasons behind any cash flow problems and some tips on resolving them so that you can be well-prepared.
1) Low margin
You have enough sales, your calendar is full, and you might have even turned some clients away … but at the end of the day, your bank account doesn’t reflect this, and you’re struggling to pay your bills. Well, my friend, it’s time to sit down and do some number-crunching because I bet your margins are super low. You may also provide some services at a loss.
Your focus should be on your pricing strategy: is it effective? Is it competitive? Be honest with yourself and always remember: you will reach your financial goals only if your business is profitable. Without a sustainable profit margin on your services, making ends meet will be a constant battle.
2) Late payments
Do you have (many) clients that consistently miss the due date? Well, that puts considerable strain on your business. Firstly, the income you worked for isn’t yours yet to spend; but more importantly, you need to send a reminder and call them once or twice; in other words: it costs you extra time and money.
To minimalise overdue invoices as much as possible, you should consider ways to encourage your clients to pay on time. You may require pre-payments or offer an early payment bonus. You may also want to review and update your collection process because the longer the overdue period is, the less likely you will receive it. Set up invoice reminders, don’t provide more services until the outstanding amount is paid or hand the debt over to a professional collection agency.
3) Too fast expansion
It may be surprising, but if you grow too fast, you may end up with some cash flow issues. Why? Because growing means that you need to make an investment in order to scale your business; for example, you need to buy extra stock, or your operational expenses significantly increase.
So, if you’re planning to grow, prepare a detailed plan, including a realistic budget and stick to it. It’s challenging to resist the temptation of overspending, I know. Plus, have extra reserves available for worst-case scenarios.
Let’s clear this: you cannot build financial stability without a stable income. If you have a loyal customer base, you’re (almost) out of the woods. A satisfied client receiving excellent customer experience is gold for your business.
4) Staff
Let’s be honest: employing someone in your business is never easy and greatly impacts your cash flow. Laying off an employee is a significant hit on your cash flow, especially when you don’t expect it to be happening. Paying out accrued leave can be massive in itself. In addition, you probably want to look for a new employee, so you need to advertise, do interviews – or hire someone to do it for you and train the new person.
All these, sometimes unexpected, expenses hurt your bottom line. Can you avoid these expenses? Well, not really: obviously, you need good HR practices and a positive working atmosphere to prevent staff turnover. Financially, you can prepare by building up some reserve funds for critical situations.
5) Lack of planning
Interestingly, most small business owners still don’t have an accurate cash flow forecast (or budget, if you like). If you don’t know what to expect, you cannot manage your cash effectively; therefore, you may be surprised to find out your business ran out of money.
Honestly, this hurdle is the easiest to overcome: get into the habit of forecasting your cash flow for the next week, for the next fortnight, for the next month and for the next quarter. Of course, you can constantly refine your forecast, it’s not set in stone, but at least you have a guiding light in front of you when you need to make a financial decision.
Key takeaways
Experiencing – temporary – cash flow problems is quite normal for every businesses. The art lies in how to prepare and how to tackle them. I profoundly believe that if you are aware of the potential risks, you can set up processes to avoid them or to minimise their impacts.
Having cash flow forecasts, reviewing and adjusting them regularly, flexibly stick to the plans and building up reserve funds are the key elements of a successful cash flow management.
I believe in You: you’re a champion 🏆
PS: If you’d like to learn more about the basics of bookkeeping, please check out the free Bookkeeping 101 mini-course by 👉 CLICKING HERE
