The #1 Reason Small Businesses Fail
If you want to be successful as a small business owner, you must understand how to properly manage cash flow, because cash flow is the bloodline of any business. In the small business world today, around 61% of startups struggle with poor cash flow, observed from the inferences of a study performed by Intuit.
About one-third of the business owners surveyed have critical cash flow challenges and can’t seem to pay back loans, pay their employees or even pay themselves.
Companies that encounter cash flow issues are not likely to survive the turmoil, according to Business Insider, 82% of businesses fail because of cash flow issues. That’s a whole lot.
Hence, proper cash flow management is critical to the long-term survival and success of every business.
So how do you overcome cash flow issues?
How do you stay ahead and ensure your small business crumbling due to an inability to pay loans or employees? Read through this article to find that out.
There are several cash flow strategies you can employ to ensure your small business flourishes in the long run.
But, just before that, let’s take a brief look at what cash flow management entails and as well, see how wrong cash flow decisions can affect your struggling business. This would be accompanied by fool-proof strategies you can use to save your struggling business from a cash flow crisis.
What Is Cash Flow?
Cash flow is the movement of funds (cash) in and out of your small business.
While cash flow management is how you manage the movement of funds in and out of your small business.
There are basically two cash flow kinds; the positive cash flow and negative cash flow.
Positive cash flow: happens when the net cash coming into your small business is greater than the cash leaving your small business for payroll and other operating expenses. Any business with positive cash flow is doing well and on the right track.
Negative cash flow: happens when there is a lesser inflow of cash into a business than there is outflow. Any business with a negative cash flow would encounter a shortage of funds to tackle business needs and essentials.back to menu ↑
What are the Main Causes of Cash Flow Crisis in Your small business?
The Top 13 Causes of Poor Cash Flow
- Zero Savings – An active entrepreneur without savings is like a man sitting on a time bomb. You won’t have any safeguards to protect your struggling business when hiccups arise, and this would result in a disaster. To safeguard your small business properly from the unexpected, you need to have savings. There are times when sales don’t go as expected, and with little or no money to settle operating expenses for production, you’re stuck. You’ll need cash you can rely on to sort out such operating expenses.
Thus, when you don’t have savings? You end up running into a cash crunch. Lack of savings is one of the major reasons why business owners fall into cash flow shortage.
- Low Profits- Profit is the major source of cash for your small business. There is a direct link between low profits or losses and cash flow problems. If your small business is unprofitable, you won’t have enough money to cover all your expenses.
- Gross Overspending / Over Investment – This happens when a business spends too much on fixed assets, especially when spending money on non-business critical things. Many newbie business owners are victims of this in their early days in business. They incur so many expenses even unnecessarily with the hope that it would make the money back. You’d indeed have to spend to make money, but there are times you shouldn’t spend especially when your struggling business is still in the embryonic stage. Consider every expense before taking out a buck, critically. You need to understand the cost – benefits of every expense before you pull out your card.
- Expanding Too Fast – Growing too quickly can be just as dangerous to your small business as not growing at all. As your small business grows, it can be easy to get to a place where your monthly expenses exceed your operating capital, and if you aren’t careful, your small business can sink if you don’t plan accordingly.
- High Overhead Expenses – Overhead expenses are the costs of running a business that are not tied directly to selling a specific product or service. Examples of overhead include rent, internet, telephone and other utility bills. High overhead expenses can hurt your small business’s cash flow, as sometimes overhead expenses get out of hand relative to the revenue the business produces.
- Unexpected Expenses – Every small business tackle with unexpected and unanticipated costs. A few of the most common unexpected expenses are equipment breakdown, loss of staff, and an increase in market competition that requires your struggling business to invest in new technology or equipment. All of these can definitely impact your cash flow almost instantly.
- Too High Withdrawals or Borrowings – Excessively high debt payments often cause cash flow problems. Consequently, your small business can’t afford its existing financing. This is a common problem for companies that have cash advances, or other high priced loans.
- High (or Low) Product Pricing – Pricing strategy has the potential to make or break your small business. You should be fully aware of what your break-even price is and your pricing should be clearly above the level per unit for goods or per hour for services. The prices you charge customers should be fluid and adapt to changes in your operational cost, consumer demand, and the competition.
- Too Much Stock – We always love to focus on the bright angle of business and not otherwise. Hence, an optimistic entrepreneur is usually not objective and realistic with future sales estimations of his business. Because your sales doubled this month does not guarantee the same next month if you keep your marketing efforts in a continuum. Entrepreneurs and business owners are usually not prepared for the worse. And they suffer a cash flow crisis due to overestimation. You need to be completely realistic and stop forecasting sales based on previous success. Holding too much stock ties up cash and there is always a risk that stocks become obsolete.
- Allowing Customers Too Much Credit – As a small business, you have to offer 30-day to 60-day payment terms to clients. However, your small business can’t always afford to wait this long for payment – you need money sooner. Eventually, allowing too much credit to your customers may create a financial problem that can seriously affect your small business.
- Late Payments – Late payment is a common problem – and slow-paying customers often put a strain on cash flow. When your company’s customers or clients are slow in paying their bills, many cash flow problems are caused by a delay in receivables.
- Poor Financial Planning – Most business owners dread handling the bookkeeping of their businesses. If you fail to perform a good cash flow forecast and don’t set your budget beforehand, you’re more likely to suffer from cash shortages and could find yourself in serious financial difficulty. Reviewing your financial statements allows you to identify potential problems before they happen.
- Seasonal Demand – Sometimes there are seasonal fluctuations that you may not anticipate. Seasonal businesses require careful cash flow management and planning. You need to establish a process to start forecasting sales and expenses accurately, otherwise you may end up with cash flow problems during the low season.
How Can a Business Improve Cash Flow?
13 Cash Flow Strategies for Your Struggling Businessback to menu ↑
Cut Unnecessary Expenses
Creating a positive cash flow is not just about figuring out strategies to increase the inflow of money. You need to slash some expenses too.
You should not spend on inessentials when you’re having negative cash flow. Cutting costs and deliberately reducing cash outflow would save you some money (or maybe a lot).
How can you slash expenses when your cash flow is going the wrong way?
Figure out expenses that are not to the growth of your small business. Take them out. You should not spend on what would not bring in cash when battling a negative cash flow. Scrutinize every coin leaving your account, down to the last penny. Only spend on the operating costs of your small business and revenue generation strategies.
You can carefully streamline and optimize every business process and make proper checks for wastage of funds or resources.
Sometimes, your equipment might be the cause of this waste of resources. Replace any faulty equipment with more efficient ones to reduce wastage, improve productivity and increase cash flow. You should also sell unnecessary and non-essential equipment and business assets to generate money.
Also, take a look at your inventory if you run a products oriented business. Check out products that are not fast-selling like other products. Get rid of them, even if you do that at a discount. You should have more of what sells and get rid of the ones that don’t.
Purchase resources in bulk and also request for a discount from your supplier when buying to save cost.
Recommended Reading for You:Financing Your Business: What You Need To Know
Lease; Don’t Buy.
Your small business needs equipment and facility to run properly, but who says you must buy them.
When your small business is undergoing a cash flow crisis, you should consider leasing some items. You can lease equipment instead of throwing up thousands of bucks for a piece of machinery that might become obsolete in future. It will be less expensive to lease and hence, guess who’ll be saving up money. Besides, you should have some foresight when acquiring equipment, especially when it entails technology. Technology is fast evolving and who would not love to keep up and use the latest tech when it bumps out?
A piece of tech which was selling like hot cakes in 2010 is no longer in use now. So, would it not be better to lease a 2019 MacBook, which would become obsolete shortly instead of buying?
Think about it. In cases where it’s nearly impossible to lease, you can buy in bulk and ask your supplier for a discount.back to menu ↑
Require Deposits on Large or Custom Orders
Having a deposit reduces the likelihood of a financial loss in the worst of circumstances. You can ask for 50% now and 50% after you’ve delivered the goods or services. But you can also ask for 30% or even 70% upfront.
Asking for an upfront payment from your client may create some hesitation and uncertainty on the clients end. There are a few methods to help alleviate some of this pressure with your client. Probably the simplest solution is to have the payment in escrow. Sitting down with your client face-to-face and going over the details of the project can create some peace of mind as well.back to menu ↑
Review Your Pricing
When your small business isn’t making as much money to cover your essentials, then you might have to consider a price review. Are you charging your customers correctly for your products and services? You need to do a holistic review of your pricing and increase your prices a little, especially if you haven’t done that in a long while. This might piss some of your customers off if you don’t do it right.
The best way to convey a price increase is to ensure your customers are satisfied with the current product or service and then add some extra features. You should add some value along with the price increase. Improvements in your products or services would also do the trick. With a new upgrade or feature, customers would be encouraged to buy more, even at higher rates.back to menu ↑
Send your invoices early and frequently
The sooner you send an invoice, the sooner you will receive payment. Adjust the management of your receivables to invoice clients immediately following the delivery of products or services, rather than sending out all invoices on a particular day of the month.
Recommended Reading for You:Invoice Factoring | What Is It and How Does It Work?
Incentivize Early Paying Customers
If you’re in a cash flow crisis, you need to get your customers to pay as soon as possible. And you can’t achieve this if you’re not ready to give them something to pay early.
Give out incentives to customers who are willing to pay their fees earlier than expected, especially those who are known to be hesitant in paying their fees. Incentives could be a discount on total fees to encourage early payment. You could give a 5% discount for customers who pay before the 10th day of the month for instance. If they don’t pay within this range, they will be required to pay full payment.
Also, you could give out gifts or freebies to show gratitude to early payers. Make sure you also send invoice reminders to your customers before due and after the due date, if necessary.back to menu ↑
Penalize Late Payers With Interest Penalties
Late payment penalties are payable by the buyer when invoice is not paid while its due date is passed. While collecting the interest may not be possible in all instances, the presence of the policy may educate your client to pay you the due date of your invoices.
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Technology can make your small business processes more efficient and help prevent negative cash flow. There are advanced technology solutions that you should use which would help you streamline your small business processes and increase efficiency. These apps and software help you handle business accounting and other financial aspects. With them, you’ll be able to predict future cash flow and protect yourself if you sense a negative one. Also, you’ll spend less time and won’t have to worry about cash inflow and outflow again.
Further, it will enable you to save cost. No need to hire a bookkeeper or accounts manager to do it for you. You won’t need to invest in big accounting and record-keeping books again while using technology. More so, access to modern technology would make your employees extra productive. It’s a big-time saver and you should not hesitate to invest in modern technology.
Recommended Reading for You:Bad Credit? Where to Find a Small Business Loan
Contract with Full-Service Commercial Collection Agency
The longer you wait to recover debt on delinquent accounts, the less likely you are to receive payment. One way to collect these outstanding debts is to contract with an agency that specialize in business-to-business collections and the recovery of large, uncollected debts. Collection agencies are most commonly paid a percentage of any outstanding funds they recover on your accounts. When they collect a payment, they hand the money over to you, minus a certain percentage in fees.back to menu ↑
Cash is the only asset to improve your cash flow. How do you generate more cash for your small business when facing a cash flow crisis? By increasing your sales and marketing efforts. The more market, the more you sell and the more cash you get to improve your cash flow. Execute effective marketing techniques and strategies and watch your sales go off the roof.
There are various internet and offline marketing strategies you can implement to get more sales. If a particular marketing campaign is stagnant and isn’t bringing forth sales, change it. Go back to the drawing and devise new marketing campaigns that focus on relevance to boost sales. For instance, you could offer a product or service freebie to lure in potential customers as lead. Then you’ll offer them your full packages if they seem to be satisfied with your freebie.
You can also take advantage of seasons where a product or service would be in demand and aggressively market them then. Invest in content marketing. Create more content that’s geared to convert more paying customers. Switch your overall marketing strategy and campaign, and watch your sales go up.back to menu ↑
Get a Business Loan
Sometimes, the best strategy to get out of a cash flow crisis is to get a small business loan or credit card advance. A loan in times of negative cash flow would help you cover the loopholes in your budget. It would also ensure your small business doesn’t shut down. While also ensuring your small business, processes work as usual while you’re looking to make money for repayment.
If you want to go with taking a loan, consult a lender network to see which loan options would be the best fit for your small business and monetary needs. Make sure you understand in entirety, the loan interest rates, and other intricacies so you won’t make a decision that would kick your small business into extinction, in other words, a business loan could equally harm your finances if you are not crafty enough in engaging it.
Renegotiate Fixed Debts to Lower Payments
Review your existing credit lines to determine whether you might be eligible for a lower interest rate or an extended term. If available, consider adding a business line of credit (LOC) which can be used in the event of emergency.back to menu ↑
Defer Payments to Vendors
You can ask your vendors for more time to pay your bill. This is sometimes called “trade credit” or “vendor credit”. Vendor credit helps small business owners purchase essential goods or services without having to approach banks or dip into personal funds and will improve your cash flow.back to menu ↑
Proper management of your cash flow is critically important to the long-term survival and profitability of your small business.
You should strive to build a ton of cash, so your small business can be sustained, and you can sleep soundly at night. Also, ensure the amount of cash coming into your small business is always greater than the outflow. A cash flow shortage can terminate the life of your small business if not handled properly.
With these seven strategies above, we are sure you now understood how to properly manage your cash outflow.
Thanks for reading.