Running a small business is no easy task. It has been estimated that more than half of all small businesses fail within the first couple of years. One of the leading factors that cause small businesses to go under is cash flow problems. A business must be able to manage both incoming and outgoing cash flow early on to create a stable platform for growing the business. Taking out small business loans is only part of the equation; having a solid plan to analyze and track all cash is the other part.
SMALL BUSINESSES GET INTO CASH FLOW ISSUES FOR MANY REASONS
According to Dun & Bradstreet, some of the reasons that small businesses run into cash flow problems include:
- Putting the focus on earning profits rather than monitoring cash flow
- Extending credit to the wrong clients who are slow or sporadic payers
- Using bad invoicing practices filled with errors or being sent out late
- Paying vendors and other suppliers too fast instead of getting longer terms
- Holding on to surplus stock or inventory for too long
- Forgetting the relationship between receivables and payables
MORE WAYS SMALL BUSINESSES GET INTO CASH FLOW TROUBLES
Of course, anytime a business experiences cash flow issues, there are generally underlying operational matters that need correcting. It could stem from financial habits that have developed over time, or from not understanding the differences between personal and business financial management. Very often, years may go by and a small business owner may wonder why he or she still has cash flow problems when the business is doing well otherwise.
An article published in Entrepreneur highlighted the top 5 underlying reasons for small business cash flow problems.
#1 – OVERESTIMATING FUTURE SALES
When business is going well, it can be easy to get comfortable and overestimate future sales revenues. But, the unexpected can and does happen when a large customer leaves and there’s no replacement income.
#2 – IMPULSE SPENDING DURING THE STARTUP PHASE
When a business is just getting ramped up and the money starts coming in, it can be tempting to spend a little extra on things on impulse. Like making the wrong decision to pay too much for equipment. It’s too easy to get overextended on credit cards and other debts this way.
#3 – PASSIVE ATTITUDES TOWARDS PAST DUE RECEIVABLES
Letting your customers pay their invoices late is shooting yourself in the foot as a small business owner. So too, is not raising your rates or charging late fees. You are not setting your business up for success by being out of all that cash for months at a time.
#4 – NOT STICKING TO A CASH FLOW BUDGET
Once you establish your groove in business, with a basic cash flow plan, do not deter from this. You may have a good month and start spending outside of your budget, but it’s a mistake. Stick to your budget.
#5 – NOT HAVING A CUSHION OF CASH FOR UNEXPECTED NEEDS
What happens when an expensive piece of business equipment breaks? Small business owners are prone to dip into their own pockets to pay for replacements. There is peace of mind when you know you have extra money in the bank for emergencies, which will happen eventually.
HOW TO IMPROVE SMALL BUSINESS CASH FLOW
If you want to avoid many of the above cash flow issues that small business owners experience, then you want to develop best practices for building a smart cash flow program. Here are some guidelines:
CONDUCT A CASH FLOW ANALYSIS
Take the time to know where you stand right now with your small business finances. The Small Business Administration provides a great resource for how to conduct a cash flow analysis. It’s critical to understand how and when money flows in and out of your business on a regular basis.
IMPROVE YOUR RECEIVABLES
Run a complete report that shows all of your current customer receivables. Focus on collecting anything that is 30-days past due now. Then connect with clients who typically pay within a month and offer them an incentive to start paying on Net 15 terms. For all new clients, bill them upon delivery moving forward, with late fees set up at regular intervals.
INCREASE YOUR FEES
Experts say that it’s a good idea to increase your baseline prices to keep up with cost of living indexes, which especially affect small business owners. This is generally around 5 percent annually. If you rent a facility for your business, you may also have other expenses, like rent and utility increases you will want to factor in.
START BUILDING GOOD BUSINESS CREDIT
Get your bills paid on time on a regular basis, even if it means sacrificing on expenditures and impulse buys. Take out small business loans to pay down your other high interest debts. Pay them on time and take out additional small business loans as needed.
BUILD A BUFFER ACCOUNT
Once you have a better handle on your customer receivables, have increased your revenue position, and are working towards better credit rating for your small business – it’s a good time to start building a cash buffer. Start with a high interest savings account. You can speed things up by getting a merchant cash advance or a small business factoring loan against your receivables.
INVEST IN THE BUSINESS
A regular practice to get into as a small business owner is to reinvest as much as possible into the success of the business. This means, selling off any old inventories and buying new products to sell. Investing profits into improving the quality of services, hiring new people, and giving customers what they expect are all good business practices.
Taking out a small business loan or merchant cash advance can support the goal of building a better business, when sound cash flow principles are put into place. A reliable and reputable small business lender can be the pathway to success for a company struggling with cash flow issues. Talk to one of our experienced financial advisors at United Capital Source for options in getting your cash flow matters under control.