5 Areas Where People Struggle with Cash Flow in Their BusinessRegardless of where you are in the world, cash flow problems that small business owners face are the same. If a business has to be viable in the long term, it's important that you be able to generate positive cash flow in a very consistent manner, year after year. When you have surplus cash it catalyses the growth of your business and if you want to steadily grow your company, you will have to focus on profitability and generating surplus cash flow; this will have to be done on a sustainable basis.
Cash Flow Problems- The Signs
- Non–payment or late-payment of supplier invoices
- Late payment of taxes
- Late payment of employee superannuation
- Direct debits getting dishonoured
- Late payment of wages to your staff
The Problem AreasA number of small businesses face cash flow problems and the only way to ensure the financial health of your company is to identify and solve these problems without delay. Here are 5 areas where people struggle with cash flow in their business:
#1 Weak gross marginsWeak/negative gross profit-margins are one of the key problem areas with reference to cash flow. In most cases, this problem tends to be small at the outset and goes undetected for some time; eventually, the result is all the same – you face a cash crunch. This problem can impact companies that operate in highly competitive markets as it compels you to lower prices. If you are not careful and set the prices too low, you can end up generating a loss Solution: The one way to avoid this is to determine what the all-inclusive cost of delivering your services and products is. Now compare those against revenues that are being generated by those services and products. Modify or eliminate the programs whose margins prove to be too low
#2 High overhead expensesThese are the costs that are associated with running your business such as rent, phone etc. In some instances, these expenses can overstep the revenues you are generating and the subsequent imbalance can impact your available cash Solution: Review your overheads & eliminate expenses that aren't absolutely necessary. If a particular expense is required, then look for options that are less expensive
#3 Money tied-up in slow-paying invoicesTypically, small businesses that cater to commercial clients, have to allow 30-60 days to pay an invoice. This ties-up cash in accounts receivable. So, your business may be profitable, but it could still be cash poor. Check your financial statements and if you see a large number of unpaid invoices and very little money in your account, slow payments could be the culprits causing poor cash flow Solution: Implement better collections; first follow-up with all your clients & make sure they pay on time. You can also consider offering clients an early-payment incentive. Consider using invoice-factoring to finance all the slow-paying invoices.
#4 Too much bad debtThis occurs when you extend any credit to your commercial clients who have bad credit. It can be a very serious problem as it's very difficult to collect. At times, the best option is to write it off & move forward Solution: In order to solve this issue; provide credit terms (net 30 to net 60). This should be given only to clients that have good credit. Clients with bad credit should prepay you before they receive any product or service
#5 Excessive inventoryThis is applicable only for the companies which sell products. They buy too many products and this ties their funds Solution: You can sell-off inventory, but its best to maintain lean inventory. It's better to purchase in larger quantities only when you have received a confirmed order from the client.
It's also a good idea to work with a Certified Public Accountant if your business is facing severe cash flow problems. They will help you understand what the exact problem is and will help chalk-out the best solution. Thanks for reading, MaxMyProfit Corporate Australia (02) 9111 5000