Let's talk about cash flow. For obvious reasons, this is a big focus for small business owners. While accountants urge companies to not use their bank account as a projection for the success or failure of the company, cash is essential to make sure payroll is met, goods can be purchased, and owner's families can be supported. It's so important for business owners to understand where their money is going, when it's time to find funding, why they may be running short on cash and how to adjust before it becomes a major issue.
Let's start with 5 indicators that a cash flow issue is coming.
1. Accounts Receivable continues to rise. If you’re A/R is growing (and not necessarily because business is expanding) that means you are spending money to provide products or services and are not getting paid in return. Cash is not coming in as fast as it is going out. How to adjust: Constantly monitor A/R and make sure you have processes in place to collect. A/R requires constant attention. Are you able to change your invoicing process to collect on receipt? Or change your terms to a shorter window? Be sure you are invoicing close to the date of service or sale. If you wait a week to invoice, that is 7 more days it will take you to receive the payment. Invoice promptly and make it easy for customers to pay. Setup ACH payment and credit card payment systems.
2. Large Inventory Requirements. If you operate a business that requires you to buy large amounts of inventory, you could run low on cash after a big inventory purchase. How to adjust: Plan ahead and set money aside. Project growth for the business and know when a large purchase order will need to be placed. Ask your vendors for longer terms or payment plans. Ask vendors if you can order in smaller quantities. Price out different sources.
3. Growing too fast. There is a lot of truth in the phrase Growing Pains. One of the pains is that growth too quickly can hurt your cash flow. You must spend money on marketing/advertising, inventory, payroll, bigger office space, etc. and many times before your sales have increased enough to cover the increase in expenses. How to adjust: Pay close attention to your growth. Plan and make smart decisions. Consult where needed. It’s true that you must spend money to make money, but you want to make sure that you are spending money in the right places. Measure your ROI. Create sales goals and corresponding expense budgets and continue to measure as you go – adjusting those goals and budgets.
4. Sales are declining. There can be many reasons for a decline in sales. Maybe the economy is declining, and you sell or service a luxury item. Maybe your competition has increased or stepped up. Maybe you’ve stopped marketing your business. Here are a few things to consider:
a. Where are your losses coming from? Is there a particular demographic where you are selling less than you used to?
b. Is there a technical or process-related problem? Is your sales page on your website broken? Are in-person customers dissatisfied with customer service?
c. Are there macro-level changes happening in your industry right now that are affecting common benchmarks overall?
d. When is the last time you updated your messaging to your customers?
e. Does your business model still make sense?
f. Is your business experiencing a seasonal fluctuation?
5. Your business model just isn’t profitable. Maybe your model just isn’t working. See if you can increase your prices or lower your expenses by cutting down on rent, payroll or other large expenses line items.
Below are a few ways you can help prevent future cash flow issues.
· Set money aside for taxes. Create a separate tax savings account and move money into it once a month.
· Have a cushion or a rainy day fund. This savings can also be used for new/broken equipment and unexpected inventory purchases.
· Know when to lease vs. buy vehicles, equipment and property.
· Make it a habit to shop around for better prices.
· Consider regular price increases in your product or service.
· Send invoices on a more immediate basis, not at the end of the week or month.
· Incentivize customers to pay sooner. Make it easy, offer discounts.
· Increase marketing to boost sales.
· Review your cash position and budget constantly.
· Leverage technology.
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