In the world of small business, positive cash flow is king. It’s the driving force that keeps your business engine running smoothly. But what happens when more money is going out than coming in? Cash flow problems can threaten the survival and growth of your business. Here’s some things you can do to ensure you don’t face these challenges.
Understanding Cash Flow Challenges
Cash flow issues can be caused by many factors including things out of your control such as recessions, natural disasters, and wars. And some things that are within your control such as business decisions and performance. By firstly understanding how cash flow challenges come about, then with some careful planning and smart financial practices, you can cushion or even avoid these financial blows.
Building Cash Reserves
One critical strategy is maintaining sufficient cash reserves. If your business faces a drop in revenue, having enough cash reserves to cover up to six months of expenses can be a lifeline. Project your cash flow by estimating sales, determining payment timelines, and calculating all expenses. Your bookkeeper can help create cash flow projections, providing a clear financial picture. We use a method called Profit First and it has revolutionised the way we think about and manage cash. If you’d like to know more, please get in touch with us.
Managing Borrowing Costs
High-interest credit cards and business loans can significantly eat into your cash. Consider alternatives like supplier financing or refinancing loans to secure lower payments. Term loans with competitive rates can also help improve cash flow by reducing the cost of borrowing.
Adjusting Pricing Strategies
Decreasing sales or profit margins, often caused by excessive discounts or low pricing, can damage your bottom line. Develop a short-term business survival plan and adjust your pricing strategy to ensure your products and services are priced appropriately, maintaining healthy profit margins.
Addressing Outstanding Receivables
Late payments on invoices can tie up your money and severely impact your cash position. To combat this, review payment terms, send invoices promptly, accept multiple payment methods, and offer incentives for early payment. As a last resort, consider selling your debt through invoice factoring. I’m a big believer in ensuring your invoicing is done quickly and efficiently, and giving your customers many convenient ways to pay you – convenient options equals quicker payment. One of the easiest things you can do is set up Stripe and connect to your Xero invoices. Next time your customer receives your invoice, they can quickly and easily pay you from their phone, during the Masterchef ad break!
Controlling Cash Flow and Business Growth
During periods of high growth, expenses can exceed working capital, leading to cash flow shortfalls. To manage this, slow down and get your finances in order. Implement new finance management measures to gain a clearer picture of your financial situation and ensure sustainable growth.
Managing Inventory and Seasonal Demand
Overstocking or failing to anticipate seasonal demand fluctuations can lead to financial constraints. Utilise an inventory management system and accurate sales forecasting to balance inventory levels and prepare for seasonal changes. Review your financials regularly so you can plan for seasonal changes.
Ensuring Accurate Forecasting and Bookkeeping
As your business grows, cash management becomes more complex, increasing the risk of forecasting errors. Hiring a professional bookkeeping service can help avoid these mistakes and ensure accurate financial management.
Final Thoughts
Addressing these common cash flow problems is essential for protecting the health and sustainability of your business. Additional tactics to improve cash flow include reducing and negotiating expenses, creating a short-term survival plan, considering borrowing options, and choosing a suitable payment setup for your business.
Cash flow problems may seem overwhelming, but they are manageable with the right tools and insights. We can advise you on comprehensive solutions tailored to your specific situation, empowering you to make informed decisions and manage your finances effectively.
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PS. Whenever you’re ready, here are 3 ways we can help you eradicate financial stress in your accounting firm or professional services business – faster …
- Sign up to our LinkedIn newsletter, published weekly. You can sign up here: Eradicating Financial Stress
- Get our book “Wow – I’m in Business! Your journey from overwhelmed to organised.” It’s full of insights, solutions and downloadable resources you can implement into your business immediately. Click here for your copy: Wow … I’m in Business! – Miss Efficiency
- Book a time with me privately and we’ll do a deep dive into your Xero file to help you optimise for cash flow, efficiency and growth. Click here to book: Book a time with Sarah
