Poor cash flow can be a death knell for businesses of all sizes, so it’s important to nip it in the bud as soon as possible.
If cash flow is starting to cause problems, it’s important to find out why the problem is happening, and then implement a solution.
Poor cash flow generally happens because of one of four possible causes:
1 | Sales Are Too Low
Poor sales could be caused by:
- Your prices being too high;
- Insufficient demand for your product or service;
- Your sales and marketing efforts not working.
If poor sales are the problem, you need to take a hard look at your prices and make sure they’re in line with what the market will bear. You might also need to invest more in marketing and advertising to generate more interest in your product or service.
2 | Expenses Are Too High
Expenses can be too high for a number of reasons, including:
- You’re overstaffed;
- You have too much inventory;
- Your office space is too expensive.
If your sales are healthy, but you still have cash flow problems, you may need to look at your business expenses.
It’s not uncommon for business owners, especially in small businesses, to ramp up spending when sales are high.
However, this can lead to cash flow problems when sales inevitably dip. If you find yourself in this situation, you need to cut expenses immediately to get your cash flow under control.
If expenses are the problem, you need to find ways to cut costs without sacrificing quality or service. One way to do this is to streamline your operations to make them more efficient.
You might also need to renegotiate your lease or downsize your office space to save money.
3 | Customers Are Not Paying on Time
If sales are high and spending is normal, the most likely cause of your cash flow problems, is around your customers who have credit but not paying their accounts quickly enough.
According to a recent study, businesses are waiting an average of 52 days to receive payment on invoices.
This can wreak havoc on your cash flow if you’re not careful.
If customers are not paying on time, you need to take action to encourage them to do so.
One way to do this is to offer a discount for early payment. This will give customers an incentive to pay their invoices as soon as possible.
You should also consider implementing a late fee for payments received after the due date. This will help discourage customers from paying late.
Finally, you can send reminders before the due date to remind customers that their payment is coming due.
4 | Holding Excess Inventory
Often businesses are holding inventory which is potentially obsolete or extremely slow-moving, which leads to taking up unnecessary floor space.
It is better to sell the inventory at reduced margins or at a loss, so that the generated cashflow can be reintroduced into the business, and in turn, it can be used to purchase new inventory in lesser quantities, that meets current market demand. I refer to this as the Circular Flow of Cash.
If you’re holding too much inventory, you need to take steps to reduce your stock levels.
One way to do this is to offer discounts on slow-moving items. This will help you clear out your inventory and generate some extra cash flow in the process.
You can also consider selling off excess inventory to liquidators or other businesses that specialize in buying overstocked merchandise.
By taking these steps, you can free up some much-needed cash flow and keep your business running smoothly.
Cash Flow is the lifeblood of any business, and today it’s more important than ever to safeguard your money and avoid any cash flow issues that could jeopardize your company’s growth.
A sound business plan is essential in order to maintain a healthy cash flow, and a cash flow forecast will help you anticipate any bumps in the road so you can stay on track.
By taking these precautions, you can protect your business and ensure its continued success.
How did you find the article? This is a chapter from my book: Starting a Business, Growing a Business. The Critical Insights No One Tells You About, But Should.
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