Your business can’t operate without cash – except when it must. Most businesses, especially in their early years, endure cash flow troubles, but the best business leaders know how to react when poor cash flow threatens their young enterprises. If you suspect your business might be suffering from issues related to cash flow, you should review the following guide to common cash flow difficulties for tips and tricks to see your business through.
1. Your Clash Flow Is Seasonal
Heater repair for commercial building maintenance is hardly in-demand in May, and popsicles rarely fly off the shelves in December. If your business sells goods or services that are only sought-after during part of the year, you likely suffer from imbalanced cash flow.
Plenty of seasonal businesses go into hibernation during their off-seasons, maintaining fewer staff and bringing operations to a slow crawl to cut expenses. However, you can also use a line of credit to fill the financial gaps until your seasonal revenues rev up.
2. Your Overhead Expenses Are High
Businesses incur plenty of costs that aren’t tired directly to making money. For example, you likely pay for office space, telephone services, electricity and gas, etc. – these are your overhead expenses. Unfortunately, because none of these payments will make you money, they can easily cause cash flow problems.
The solution is straightforward, but it isn’t always easy. You must audit your overhead and reduce expenditures as much as possible. If you can’t eliminate an expense, you might consider cheaper options – at least until you have a stronger cash flow.
3. Your Invoices Don’t Pay Fast Enough
You must offer your clients terms of 30 to 60 days to complete invoice payments – it’s not the law, but the precedent is so strong, it might as well be legally mandated. Unfortunately, many businesses can’t wait that long to be paid.
Fortunately, the solution to slow-paying invoices is simple: invoice factoring. A factoring company will gladly pay you today for invoices that won’t come due for a month or more. Unlike lines of credit or business loans, factoring doesn’t incur debt, making it a low-risk solution to cash flow trouble.
4. Your Cash Is Tied Up in Inventory
There is a fine line between not having enough inventory and having too much. While it might seem smart to have plenty of stock to sell, if you aren’t making sales fast, you won’t have any cash on hand to grow the business in other ways.
Your first goal should be to move your inventory. You can advertise sales, offer client discounts, and otherwise incentivize purchasing as soon as possible. Then, you must fine-tune your inventory management for small business. Acquiring an automatic inventory management system is a smart way to save time and money in your inventory process while preventing your inventory from interfering with cash flow.
5. Your Gross Margin Is Slim
Then again, if you can’t keep inventory on your shelves but you still lack the cash you need, you might have miscalculated your gross margin. Your gross margin is the true cash you have to spend, and if you are slashing your prices too low, you might be robbing yourself of vital income.
Subtracting the cost of goods sold from your total revenues and dividing that by your total revenue, you should obtain a percentage that represents your gross margin. The bigger the number, the more cash you’ll have on hand. If your gross margin is tiny, you probably need to reconsider the prices of your products.
6. Your Cash Flow Forecasting Is Poor
By looking at the past and considering upcoming months, you should be able to generate a picture of your cash flow future, which in turn will tell you how you should spend today. If you are using tarot cards or knuckle bones to make investment decisions, your forecasting likely isn’t accurate.
You can’t foresee the future – but your accountant might be able to. Within most accounting software, there are tools to assist with accurate cash flow forecasting. Once you have a forecast, you should look for discrepancies between what’s real and what you expected, so you can refine your spending strategy.
7. Your Books Are Disorganized
Still, even your accountant can’t help you if you don’t have an accurate record of income and expenses. To many entrepreneurs, the numbers are boring; it’s the creative process of building products and sales strategies brings the thrills. When you don’t place some emphasis on maintaining picture-perfect books, you won’t have enough cash for creativity.
Your first step should be to hire an accountant equipped to dig through your financial history and gather the important information. Then, if you are unwilling to uphold your books, you should keep an accountant on staff. While this doesn’t solve cash flow problems, it brings you closer to identifying their cause and finding appropriate solutions.
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