Over 50% of businesses fail in their first 5 years because of cash flow problems. Most businesses face cash flow problems at some point, but many cash flow problems can be prevented by planning ahead and finding the right balancing strategy.
Some common problems and how to avoid them
Not being up-to-date on your books
If your books aren’t up-to-date, trouble is just waiting to strike. For example, cash flow has a lot to do with timing. Even if you’re busy (and charging a good rate), your business will suffer if you don’t have a system in place for paying bills on time and invoicing your customers. You need to have an accounting system in place that fits your business’s needs.
High overhead expenses
Overhead expenses are costs that aren’t directly related to the cost of a product or delivery of a service, such as rent and salaries. These big-ticket items can really hurt cash flow if you don’t plan for them properly. When your books are updated, and you have accurate financial reports, you can audit your expenses and make smart decisions on where to cut back.
Excess inventory
If you carry too much inventory, not only are you tying up your operating cash, you’re also running the risk of higher losses (such as products expiring or going out of season). Not having enough inventory on hand can also be a problem, as this can lead to revenue losses. When you have an accounting system in place, it’s easy to come up with your optimal inventory counts.
Bad debt
Bad debt is money your customers owe that can’t be collected. Invoices over 90 days old have only a 45% chance of being collected! The likelihood of ending up with bad debt can be minimized by setting up a system to review and follow up on outstanding invoices. If you’re too busy to follow up on your receivables, you’re working for free, and that’s certainly not helping your cash flow any.
Slow-paying invoices
Many small businesses can’t afford to wait a long time for payments. With the right accounting system in place, you can speed up your payment collection. For example, by sending invoices electronically and offering electronic payment options, you can speed up payment collection by 25%! Likewise, if you’re offering 30 or 60 day payment plans to your clients, offering early-payment discounts can motivate clients to pay more quickly.
Bottom line: you can’t run a successful business without knowing your numbers. Let’s get you on the right track!