Are these cash flow problems killing your small business?
Sales decline, late payments, and excess inventory are only some of the leading causes of cash flow shortage. Poor cash flow can impact your small business in many ways such as:
- Delayed payments to suppliers – which can give your business a negative impression
- The use of personal funds to cover business expenses
- Decreased credit ratings due to late or missed debt repayments
- Business closures
It is wise to find out the root causes of these cash flow issues and address them effectively. While it varies for each small business, these 6 common cash flow problems might be hindering your business growth.
One of the challenges for small businesses is the late payment on invoices. Outstanding receivables, when not collected immediately, can amount to a temporary or permanent loss – leaving your business in a poor cash flow position.
This can be prevented, or at least be mitigated, by:
- Defining your agreement and terms and conditions clearly
- Assessing your client’s creditworthiness (ie. payment history, reputation, and their capacity to pay on time)
- Making sure that your clients have a clear understanding of your agreement
Seasonal fluctuation of customer demand
Many small businesses go through a seasonal fluctuation in customer demand. Thus, affecting their sales for that period of time.
Small business owners should create a business plan for these seasonal changes. Cash flow projections and sales forecasting can help them assess the best course of action when demand begins to decline.
Decrease in profit margins
Some small business owners sell their products or services at a lower price to attract more customers. Although it may sound a good strategy, it can result in low profit margins. Thus, limiting the business’ capacity to have a positive cash flow.
Take time to review your business expenses and see if your pricing strategy can sustain them. This helps you determine whether to adjust your prices or discontinue products or services with low margins.
Limited cash reserves
When cash reserve is limited, many areas of the business are affected. For example, it can delay paying employees on the payroll. Lack of cash reserve can lead business owners to apply for loans – which isn’t always easy for some businesses.
Other than applying for business loans, having a cash flow forecast can help you determine how much financial resources you should reserve. Make sure that you have enough cash to cover at least six months of expenses to avoid negative cash flow.
Unable to separate personal and business bank accounts
Do you keep your business finances under the same account as your personal savings? Using your personal finances to keep your business running might be tempting – and vice versa. This strategy will make it challenging to track your business cash flow.
Separating your personal and business bank accounts does not only improve your cash flow management. This practice is beneficial for the following reasons:
- It keeps your bookkeeping more organised and accurate
- It helps build your business credit score
- It clears you from personal liability
Inadequate bookkeeping practices
As the business grows, cash management becomes more complex. A lot of adjustments have to be made to sustain your business growth. The inability to adapt to these changes can lead to uncontrolled expenses.
There are many ways to address the struggle. You may consider improving your accounting system or hiring a bookkeeper to look after your bookkeeping needs – and help you focus more on your business!
How we can help you and your business?
Call us today for a free discussion with Fabiana Silva, a registered Bookkeeper and BAS agent.
Read more about Fabiana Silva and Focus Bookkeeping.