Cash flow challenges are a primary determinant of small business failure. It is imperative to evade and resolve cash flow challenges if you are looking to build a healthy business—starting incorrectly could be difficult to recover from. In this article, we will discuss seven cash flow challenges and what small businesses can do to resolve them.
Expecting Quick Profits
A survey by Kabbage discovered that as much as 84% of small businesses become profitable within the initial four years of business while 68% become profitable in their first year. Building a business takes time, and if you aren’t ready for this, your business could be facing cash flow challenges early on.
Not Preparing a Budget for Cash Flow
Cash flow budgets will give you an estimate of the amount of money you will receive and the cash flow you will have to pay during a certain period. To prepare a cash flow budget for the next month, estimate how much money you will expect to spend and receive within that time frame.
Ignoring Expensive Overhead Costs
If your business’s overhead costs are high, your business is likely to face cash flow challenges. Rental costs, travel, and high car leases can quickly affect your profits. When your overhead costs are high, you’ll be faced with an uphill battle. Expensive overhead costs will have you selling more to cover them and balance the books.
Slowly Collecting Receivables
You may be successful in selling, but if your customers are too slow in paying up, you will end up being faced with cash flow issues. Collecting receivables slowly or not collecting them at all could suffocate growth and your business will lack the finances it needs to move forward. Cash flow issues caused by slowly collecting receivables will make it hard to pay your bills.
Growing Too Fast
Many business owners want to advance their businesses, but at times, growing too fast could create cash flow challenges that could hurt your business. For instance, if you get a big-time client contract that is ahead of your business’s current capabilities, to get this job done on time, you hire additional members to deliver. However, when payday comes, you won’t have enough money to cover their salaries, as you are yet to receive any payment from your new client. This will put you in an awful cash flow position.
Inadequate Profit Margins
Your business’s profit margin is a fundamental metric to identify when evaluating prices. Profit margins tell businesses what amount of money they make from how much they earn. When your profit margins are low, it means that either your costs are high, your prices are low, or at times, both. You will face cash flow issues if your profit margin isn’t strong enough.
Disorganization
Staples once reported that three in every four struggling small businesses think disorganization leads to a drop in productivity, and about 40% cannot deal with numbers. These are major challenges that affect your business’s cash flow. You could be facing bankruptcy and you wouldn’t even know it. If you aren’t planning, forecasting, and budgeting, you could have no idea of the actual state of your finances.
Tips for Solving Cash Flow Issues for Small Businesses If you are faced with cash flow challenges, then changes need to be made. Here are some common solutions to aid you to deal with your cash flow issues.
Prepare a Budget for Cash Flow
Cash flow budgets help businesses make plans ahead of time. By preparing this, you can predict which months to expect a cash deficit and which to expect a cash surplus. It also gives you a concept of how much money your business will need in the years that follow.
Get Help
Handling every aspect of your business all by yourself will hurt not only you but your business also. You could always get help. You can hire an account to help you, or even get a virtual CFO.
Cut Expenses
If you notice that your business is running low on funds, then you may have to take a look at your expenses. Your business’s expenses may get out of hand when you weren’t closely paying attention.
Access a Line of Credit
Getting a line of credit that provides your business with fast access to cash when they are needed could be a great way of dealing with a cash flow issue. Short-term loans, overdraft facilities, and credit cards can all get you fast access to cash. All you have to do is find the source of income that suits your business best. Every business will be faced with cash flow issues at one point or another. Ensure you don’t panic and address the situation as rationally as possible. By knowing these common causes of cash flow issues, it would be easier to tackle them.
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