7 Ways To Avoid Cash Flow Issues For Business
One of the most crucial elements in a thriving business setup is cash and how it moves through an operation. It’s a familiar maxim that failure to sustain a positive cash flow ultimately fails the entire venture. Considering its impact on a business’ financial health, maintaining a sustainable, positive cash flow should be your top priority.
Financial issues during the startup phase should be nipped in the bud, lest the capital pit becomes too deep to fill. Still, keeping tabs on cash flow shouldn’t be the only concern of budding businesses. Entrepreneurs must remain adroitly aware of their capital balances at any point in time. Only by keeping a close eye on finances can businesses curb the threat of diminishing capital momentum and the need to overhaul operations.
Discover the common issues startups face and seven ways of solving cash flow problems for small businesses.
1. Miscalculating Startup Costs
Many businesses get off on the wrong foot by underestimating startup costs. This often comes back to haunt a firm’s capital position while leading to dead ends. Miscalculating your startup’s needs can be extremely painful, especially when you realize you’re out of money even before your undertaking could take flight.
To avoid cash flow problems from the start, a realistic estimation of startup costs must be in place with a margin for unforeseen expenses. There are dozens of helpful resources available online that can aid your budgeting efforts. Besides building a comprehensive business plan that lays out all this information, ensure your startup capital is sizeable enough to withstand the worst-case scenario that could unfold.
2. Being Impatient With Profitability
While it’s easy to fantasize about opening your doors to hundreds of customers waiting to rush in, don’t get too carried away. Reality often has a contrasting picture to offer.
Building a brand and earning customers’ trust is time-consuming. According to one Kabbage survey, for companies that manage to stay afloat, profitability comes within the first four years for at least 84% of small business owners. Approximately one-third of the startups don’t even get to the profitability milestone in the first year. While 68% do reach this goal in about a year, it takes time to build a reputation.
Companies facing cash flow problems are usually the ones that are unable to come to grips with this unsavory fact. To avoid encountering such a situation, you must set a realistic time frame for reaching profitability and have enough backup cash to sustain you during this challenging period.
3. Failure To Come Up With A Budget
A cash flow budget specifies the cash you expect to drive in through your venture and the amount you expect to pay over a specified period. Another name for this is the cash flow forecast or financial projections. You can create this budget for a month by projecting the amount you’re expecting to spend and receive in carrying out your business during the next 30 days.
Budgeting in advance proves a better strategy than day-to-day budgeting, especially when trying to mitigate dealing with cash flow problems. This is because it allows you to foresee downturns and rein in your spending at any point.
With a thoroughly calculated budget in place, you always have answers ready to address daunting questions. For example, will your backup finances be able to hold out until the initial inflows arrive? When’s the first great bulk of your receivables coming? Do you have an alternative in case the receivables fail to materialize?
4. Ignoring Significant Overhead Costs
Another reason why companies run into cash flow issues is high overhead costs. These are indirect costs that go into operating an ongoing business. Failure to keep track of expenses can quickly decimate your capital position. Costs associated with rent, utilities, travel, accounting, and car leases are typically recurring and quickly eat away at funding unless you have sustainable budgeting in place.
Putting up with substantial overhead costs can land you in dire straits. The most significant chunk of your profits can conceivably end up covering just these expenses. The smartest thing would be to get an accurate estimate of the direct and indirect costs. Think about all the possible ways to cut business expenses that aren’t adding to the bottom line. This is the surest way to alleviate financial burden.
5. Delayed Receivables
The ordeal for startups doesn’t stop with a successful month of selling. There’s still a long way to go before the cash starts rolling in. This is because many firms, especially during their initial phase, struggle with collecting their receivables.
During the everyday operations of an ongoing enterprise, cash can dwindle quickly. If customers choose to delay payment, it only escalates cash flow problems. Growth can quickly be stifled without the money to pay the recurring bills.
To fix this problem, make sure that you’ve got a receivables collection process in place. You can also secure help from accounting software for small businesses to generate back-to-back invoices and timely reminders. With some experience, you’ll learn to extend credits exclusively to customers with a prompt payment history while positioning yourself better to handle any cash problems that arise.
6. Peaking Too Soon
While there’s nothing more a company desires than success, hitting a home run too soon can sometimes backfire.
Here’s an example. Suppose you land an extremely profitable large-scale project. You realize your current setup isn’t sufficient for the task, so you hire additional staff and resources. If your first receivable doesn’t come rolling in before payday, you’ve suddenly hit a dead-end. A solution could be to access a line of credit and draw short-term loans to cover the duration of the project’s costs until receivables arrive.
7. Insufficient Profit Margins
If your profit margins are too low, sustaining positive cash flow will be an uphill battle. Setting the right price for your product involves a thorough understanding of your numbers. Abnormally high costs, extremely low pricing, or both, can be factors behind poor profit margins.
You can address this by continually reviewing your profit margins to figure out whether it’s the costs or product pricing that needs revision. Invoicing software can assist you with tracking these numbers and highlighting areas for the necessary adjustments.