Why Your Business has Poor Cash Flow

Positive cash flow is what helps to keep your company moving forward. When you have a positive cash flow, you will always have enough to cover your liabilities. If you have poor cash flow or negative cash flow, however, this can threaten your business globally. It can also make things much more difficult to recover from, such as economic downturns or even recessions. If you want to make sure that your business always has a positive cash flow then one thing you can do is take a look below.

Lack of Cash Reserves

If you want to protect your company, in the event of a drop in revenue, then you need to keep enough cash reserves so that you can cover up to six months of your company operations. Even though putting this amount away can be difficult, you have to remember that it helps you to save and it also gives you the chance to give your business more security and stability. In some instances, it could even save you from going under, which is critical when you look at the longevity of your company.

Borrowing too Much

Debt payments can cause several cash flow problems. This is especially the case when you cannot afford financing. You have to make sure that you are paying down your business loans and that you also move away from any high-interest credit cards you may have. This can eat away at your revenue more than you realize and it could also lead to several financial issues. If you want to help yourself here then one thing you can do is look into supplier financing. This can help your company to improve its cash flow and it can also help you to avoid bad debt. On top of this, it may help you to get an allowance on an outstanding invoice, which is great, to say the least.

Poor Profit Margin

You also need to be mindful of poor profit margins. If you sell products and services for far too little then this can result in you having low-profit margins. Similar problems can also arise when you have a sales team who are offering constant discounts. It may be that they are eating into your profit and this is the last thing you need. If you want to do something about this then one thing you can do is determine if you need to adjust pricing or whether you need to discontinue some of your products. If you can do this then you will soon find out if you can improve the situation you are in while setting yourself up for the future.

Receivables

If you have a lot of outstanding receivables or if you have late payments on your invoices then this can cause several cash flow problems for your company. If you want to do something about this then it is so important that you deal with them. Review all of the payments that you are due and also take the time to speed up your accounts receivable. You can also get a lot of money coming into your business if you choose to send your invoices earlier or if you simply break up your payments into weekly or even biweekly installments. Request payment upfront if you feel as though you need to and also take the time to accept a lot of different payment methods. Things like improving your cash flow through multiple payment methods can also help as customers will often abandon a basket if they feel as though they cannot complete the purchase they need. If you want to help yourself then it’s a good idea to break down your entire process too, including your average collection period. Data like this can help you to make the most out of your current situation.

Explosive Growth

Even though business growth is a good thing, you do want to avoid making cash flow mistakes during this phase. Shortfalls can come from you simply overshooting your growth as well as not being able to understand the difference between your profit and your cash flow. You also need to make sure that you are finding ways to prioritize your financing. If you grow too fast then it may be difficult for you to track and learn how to implement new measures. Take it slow and make sure that you always have a clear picture of your situation so you can avoid pitfalls later down the line.

Too Much Inventory

Overinvesting or even seasonal changes can also impact your business. It can also leave you in a bit of a pinch if you suspect that you have a lot of upcoming expenses. Monitoring inventory can help you in instances like overstocking and it can also prevent you from running out of key products too. A lot of businesses experience things like seasonal fluctuations and if you do not account for changes like this then you may find yourself in a less-than-ideal situation. Solutions, such as having far too much inventory to hand can be stopped if you simply take the time to use a strong inventory management system. You should also consider using different ways to balance your inventory. Keeping inventory on hand for as little as possible can be helpful but you should also try and make sure that you make accurate projections for the future too. If you can do this then you can account for seasonal changes that could cause fluctuations in your stock.

Inaccurate Forecasting

Inaccurate forecasting can be straightforward and it can also help you to eliminate a lot of accounting mistakes. A professional accountant or even a bookkeeping service can help you pinpoint accounting mistakes. They can also help you to look at your historic cash flow and tell you where you went wrong and how you can move to create more accurate predictions moving forward. If you can, you need to invest in your process and you also need to take the time to hire an accountant. Hiring an accountant might seem expensive if you are moving in-house, but at the same time, you also need to consider how much you’ll be saving. If you are worried about the expense then one thing you can do is hire a freelance accountant. They can work for you as and when needed, and you won’t have to worry about how you are going to pay for things like office space, sick pay, or vacation pay. Small things like this can make a huge difference, so keep that in mind.

Have a Survival Plan

If you want to ensure the success of your small company then another thing you need to do is try and make sure that you have a good idea of how you can help your business to survive. If you have a business plan that works on a cost-basis then one thing you can do is try and use job costing so you can find out how much profit you are making, as well as how much of a loss you are making. If you can understand this kind of information then it will help you to balance your cash flow and it will also give you a good idea of how to make the most out of your business line of credit. Things like this can be invaluable, so try and keep it in mind as it will make a major difference to your cash flow.