A healthy cash flow is a necessity for any small business. Unfortunately, cash flow problems are all too common among businesses of all sizes. Avoiding the most common cash flow issues is one of the best ways to ensure that your business continues to operate successfully. Below are some of the most common cash flow problems you may encounter, as well as tips for avoiding them.
- Your cash flow isn't being monitored properly.
One of the most common mistakes businesses make is ignoring their cash flow altogether. In such cases, you may not become aware of a cash flow problem until it has already done significant damage to your bottom line. To avoid this mistake, spend some time mapping out your income and expenses so you can understand where your money comes from and where it goes. After you have an idea of your current cash flow, you can begin optimizing it. You should also continue to monitor your cash flow over time so you can resolve potential problems as early as possible.
- Inventory ties up too much of your money.
It is important to have enough inventory in stock to fulfill all orders quickly. However, holding too much inventory for an extended period of time can compromise your cash flow. Analyze your sales cycles and current inventory carefully to determine if this is a problem for your business. If you find that you are holding too much inventory, make changes for the future to free up some capital.
- Expenses are too high.
Perhaps the most obvious cause of cash flow problems is taking on too many expenses. When your expenses are too high, your cash flow suffers as a result. In some cases, exorbitant expenses can even cause you to lack the capital you need to continue operating your business without taking on debts. To avoid this problem, analyze each of your current expenses carefully to ensure that they are both necessary and as low as possible. For example, if you have expenses related to credit, look for ways to lower your interest rates and/or your monthly payments.
- You aren't collecting from customers.
Another obvious cause of cash flow problems is a lack of income from sales. If your business sends invoices, you need to do everything you can to make sure your customers are making their payments on time. Be sure that you send invoices immediately after a customer makes a purchase, and consider offering an incentive for customers who pay their bills early. If a customer doesn't pay on time, take collection action as soon as possible to recover the debt.
When your business has a healthy cash flow, you have the freedom you need to make wise decisions and continue to grow. By avoiding the issues above, you can ensure that your business' cash flow is as steady and reliable as possible.
Do you have the support you need to manage your small business bookkeeping?
Schedule a 30-minute appointment to speak with a local small business adviser.