When you start a small business, a crucial element to get a handle on is your cash flow. You could be a profitable company with a negative cash flow and this will eventually sink your business. Here are seven cash flow challenges and how to solve them:
1. Unreasonable overheads
Overheads are the constant payments which a business needs to make. They can be payroll, rent, utilities etc. It is important to monitor them on a constant base and make changes where applicable. If you can operate your business out of your house, then you could save on rent. Ensure that you are not paying unnecessary overheads for your business. Another place where you can cut back is by buying equipment which suits your budget.
2. Mismatched credit terms
You will have credit terms with your suppliers and your customers will have credit terms with you. It is important to have these in sync. If you have to pay your suppliers before your customers have paid you, you may find yourself in a bit of trouble. Try to negotiate favourable terms with your suppliers and customers. When paying your supplier ensure that you pay as close as possible to the due date. This will ensure you have a positive cash flow.
3. Slow-paying or bad debt clients
Many entrepreneurs struggle to get clients to pay on terms. It is important to research a new client’s credit record to ensure they are good payers. If you find out they are slow or bad payers and they don’t want to do business with you because you won’t offer them credit, then it is their loss and your gain. You can offer to give them credit if they prove that they are reliable payers after a set number of months. You can encourage slow payers by giving them an incentive to pay early. You can offer them a discount. Just ensure that the discount offered is never more than 3%. If they do pay late then ensure to state a penalty that will need to be paid on late payments.
4. Small profit margins
In highly competitive industries, this can become a real cash flow problem for small businesses. It is important to work out the all-inclusive cost of creating a service or product. Make sure you take into account the raw materials, labour costs, and energy costs. When you know the complete cost to produce a product and compared it to the price you are selling the product at you will have your profit margin. If this margin is small, it may be good idea to reassess the pricing or removing the product or service from what you provide.
5. No cash flow forecast
Until inventory is sold, it is a liability to your business. You need to ensure that your product will move before you have a cash flow problem. You can solve this problem by doing a cash flow forecast. Review how many products you sold in previous months. If you run a seasonal business this is of utmost importance. By ensuring you have enough goods during your high season so that you can save some of the profits for your low season.
6. No credit line
You need to secure credit before you need it. If you only look for loans and credit when you need it then you may pay higher premiums, then when you secured it when your business had a healthy cash flow. It is important to try secure credit where you will only pay for it when you use it. By looking for credit when your business is in the positive you will be able to negotiate better repayment plans.
7. Late invoicing
When you start your business, your priority should be on setting up a good invoicing system. You can use an excel spreadsheet or accounting software. By setting up your invoicing and ensuring you send out invoices when the job has been completed, you will be well on your way to having a positive cash flow. If you do not send out your invoices on time or fail to collect your payments, you may struggle to get paid by your customers. Therefore, it is imperative to have a good invoicing system in place when you start your business.
By facing these seven challenges and solving them, you will ensure that your business’ cash flow will not become a problem that you can’t solve.
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