5 Tips to Avoid Cash Flow Problems

As badly as you might want to make the sale, the late payments will hurt your business’s cash flow. If you opt for a sale despite any questionable credit, be sure to set it up with a high interest rate. But unless your company is flush with cash, you’re going to want to maintain a cash stream for day-to-day operations. If you own a business and your sales or top line are growing at a rampant pace and you’re increasing profits each year, you’re certainly headed in the right direction. Even growing, profitable companies can be hit with cash flow problems if their finance, operations, and/or investing activities aren’t running efficiently.

Cash shortages can cripple small to mid-sized businesses — but solutions like early payment programs can help boost your cash flow before it’s too late. The right technology and the right business strategies can make a big difference for your company. They allow you to spend less time worrying about cash flow and more time running your business. If you don’t feel confident in overseeing your cash inflow and outflow, you can always hire a CPA or bookkeeper to do it for you.

How Can a Fractional CFO Help You Save Money?

If you land a new client with large requirements, for example, you might be required to make new hires to meet demand. However, if you don’t have the cash to pay them when it comes to the end of the month, you’ll find yourself in need of credit. Inventory management is a fine balancing act – not enough inventory and you run the risk of being unable to fulfill customer orders but too much and you are inefficiently deploying capital. Particularly poor inventory management in the form of owning too much stock can lead to cash flow problems if you have too much capital tied up and not enough to cover your costs. Managing cash flow is difficult, especially for small- and medium-sized businesses. However, cash management is necessary to make sure financial difficulties won’t plague a business.

The right tools can digest your business data to identify patterns beyond human perception, providing new insights. A healthy cash reserve will help mitigate any potential fallout and give you the time needed to weather a temporary shift or adapt to a permanent one. Expenses, especially when they’re unexpected, can also cause significant cash flow issues. In some businesses, it is typical that consumers make partial payments for the services they receive. A portion of the payment is deliberately withheld to ensure the customers that all the obligations and services agreed upon will be performed satisfactorily.

Find those expenses and see how removing them will affect your cash flow budget. A cash flow forecast is also a great resource to help you make important decisions, such as when to make a capital expenditure, or whether or not to cut an expense. This budget can be more useful than a standard budget in the day-to-day running of your business because it will help you get a handle on your cash position at any point in time.

Financial Issues in Business

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• As entrepreneurs, we all have a fear of running out of money and having cash flow problems.
• Everyone loves an incentive, and if you offer customers a discount if they pay their bills ahead of time, you’re creating a win/win situation for both of you.
• If you own a business and your sales or top line are growing at a rampant pace and you’re increasing profits each year, you’re certainly headed in the right direction.
• This was the case for Casablanca Foods, a small business that supplies major food retailers such as Costco.

The day-to-day operations of your business will involve taking money in and spending it on expenses that keep you operating. Understanding and managing cash flow issues are two keys to the success of your company. Tracking your cash flow is essential to keep your business safe. As part of a good cash flow management, you should create a cash flow statement and make projections. While it’s sometimes confused with profit, cash flow refers to all the money flowing in and out of your business accounts. Your business may look profitable on paper with steady growth, but if your funds are all tied up in inventory or stock you may still have trouble paying the bills.

Create a short-term business survival plan

For this article, the focus will be on common cash flow problems and solutions that international businesses may face. The invoicing process itself must work efficiently and any late, outstanding invoices require a pressure plan to force payment. Allowing customers to pay late is unacceptable and disruptive to your business. If problems with collecting are an industry norm, allocate the time to make collections a regular habit. Beyond using analytics to understand what is currently happening with your business, you should invest in forecasting software to better predict what will happen with your business.

By leasing, you pay in small increments, which helps improve cash flow. An added bonus is that lease payments are a business expense, and thereby can be written off on your taxes. Strategically borrowing money can be a viable option, as long as you Cash flow problems have a repayment plan in place. You should monitor your other expenses and make changes where needed. You may have to shift from a long-term investment mindset, such as buying equipment, to a short-term survival mindset, such as leasing equipment.

A fifth sign of poor cash flow management is having poor cash flow reporting. This means that you are not monitoring, measuring, or communicating your cash flow performance and position, and that you are not using the right tools or metrics to do so. Poor cash flow reporting can result in inaccurate, incomplete, or outdated information, which can affect your decision-making, accountability, and transparency. A cash flow statement can help you evaluate your liquidity, solvency, profitability, and efficiency, and compare them with your budget, forecast, or industry benchmarks. Sales — and the results of sales, your account receivables — play the most important role in cash flow management for small businesses. Without customers wanting to buy your products or services, no matter how much initial capital, loans, or investors you have, your business will not survive.

Not Creating a Cash Flow Budget

Read our buying guide to help you choose accounting software for your small business. This is one of the toughest ones since no one can predict the future and prepare for absolutely every scenario. However, having a cash reserve can help pull you through during an unforeseen circumstance. Furthermore, the more you follow the business world, market, and competitors, the better chance you’ll have at predicting external effects and staying ahead.

To get a more accurate view of job costing for pricing, make sure you engage in time tracking to see if you’re allocating the right fees for the time spent on the job. The situation where profit and cash flow are at odds is very common for a small business which must invest in assets in order to grow. The quick fix for low cash flow in a given month is to pull out the credit card to cover costs.

Late or partial payments

Expansion and new market entry is an exciting time, but it can strain cash flow – especially when underestimated. For some businesses, startup costs can end up being more than expected, or they weren’t appropriately budgeted for before expansion. Doing so can be beneficial for both business owners and their customers. It provides customers with added convenience, while ensuring that business owners can avoid volatile exchange rates and markets and still receive the total amount owed. Make sure this is all included in the payment terms and contracting before you kick off any work. If you keep low margin clients out of fear of losing cash flow, or not being able to replace them with a higher margin client, you will kill your business.

• If your customers already participate in early payment programs, you can start increasing your cash flow immediately by requesting early payment for any outstanding invoices.
• Without customers wanting to buy your products or services, no matter how much initial capital, loans, or investors you have, your business will not survive.
• This won’t work in every type of business, but it’s worth a shot.
• Bad loans inflated with interest that will never be recovered, can eat away at the cash available.

This means that you are not setting any rules, standards, or procedures for managing your cash flow, and that you are not enforcing them or reviewing them regularly. No cash flow policies or controls can result in inconsistencies, errors, fraud, or mismanagement of your cash resources. Cash flow policies and controls can help you ensure compliance, accuracy, security, and accountability of your cash flow management.

The unexpected costs and process of international payments

You can do this by paying off your loans faster, refinancing your debt at lower interest rates, increasing your retained earnings, or raising more capital from investors or shareholders. Customer payment periods of 30, 60 or 90 days are becoming more common for small to mid-sized businesses as inflation rises. If this is true for your business, you likely have cash flow issues. Try negotiating shorter customer payment terms to address outstanding invoices.

Many businesses have cash flow problems because they don’t hit their target margins, and they’re not aware that they’re not hitting them. Then, if you don’t have the necessary profits and your client pays you in 30 days, and payroll’s today, you’re in trouble. You need working capital to pay payroll before you get paid your final payment.

Some invoice upfront while others do after the fact, and the frequency and timing vary too. I can always count on my accounts getting low the few days before I invoice my client each month. According to one JPMorgan Chase study, the average SMB has just 27 days of cash buffer on hand. This may vary depending on your business though, so it’s best to calculate your own cash flow to understand your business’ unique situation. You want customers to pay their bills in rapid fashion, but in your own situation, it might make sense to hold off on paying bills until necessary. Getting payments out of the way is tempting, but it reduces the time in which a business has access to capital.