No business can afford to ignore its cash flow. And it’s a sad fact that many business owners with profitable enterprises – even those with healthy sales & good record keeping – watch in horror as their bank balances plummet. In these hard economic times, this can mean the difference between a business surviving or not.
So, what causes poor cash flow?
There are several reasons behind why a business might suffer poor cash flow. Often, it’s as simple as a business’ expenses exceeding its sales revenue. But during tough times, many customers delay paying on time and this is becoming a more common event. When you have your own bills to settle, these delays may cause you some serious cash flows issues, which left unmanaged, can spiral out of control.
Help is at hand
Many businesses are turning to debt-factoring or invoice factoring companies for help. These companies advance a percentage of an invoice’s value (quite often up to 90.0%) and pay the remainder when a customer settles their invoice.
They make their money by charging administration fees for their services. For many small business owners, this is becoming an increasingly attractive option. Sales are turned into cash much sooner than normal and help take away some of the stress and worry that cash shortages impose.
Another solution to maximise cash flow is to take full advantage of the credit terms offered by suppliers and service providers. Keep cash in the bank as long as possible by not paying any sooner than is necessary. But be careful not to become a later payer yourself.
Often an immediate cash injection may be required to overcome short-term liquidity issues or to purchase essential supplies or services. In times like these, you should not be afraid to approach your bank or investors or even source finance from other sources. But this should be seen as short-term only and only when repaying the loan repayments will not make matters worse.
Prevention is better than the cure
Robust and careful financial planning is an essential ingredient to any business’ survival. Cash flow problems can often be avoided by forecasting receipts and payments. By preparing forecasts, you’ll be much more able to predict the peaks and troughs and make plans to address them.
Understandably, many business owners hate the thought of upsetting customers – especially in tough times. But, unless you’re a charity, you must study your customers’ payment profiles and encourage them to adhere to your payment terms. By continuing to supply slow or poor paying customers or accepting their barrage of excuses, you’re creating a potential headache for yourself. You’re not a bank and their payment delays may have a disastrous effect on your ability to run your company.
Ignore your cash flow at your peril. Running out of cash is the number one killer for small business. Don’t become a statistic – operate tight financial control on your debtors and watch your bank balance grow.
Contact one of our business advisory services team to see how a cash flow forecast could help transform your business.