In fact, studies have found that 40% of smaller businesses have experienced cash flow problems within the last year.
The reasons for this are varied, and often unpredictable. But the good news is that, while unpredictable, the state of your cash flow isn’t entirely outside of your control. In this instalment of our series on cash flow for businesses, we will help you understand what causes cash flow problems and identify the warning signs for your business.
Identifying Cash Flow Problems
There are lots of reasons you may find yourself with negative cash flow. Sometimes it can be difficult to figure out the direct reasoning, so instead you need to look for the warning signs. If your business is suffering from any of the following 5 symptoms, your business may well be in danger of cash flow problems, if it isn’t suffering from them already.
1. Your Accounts Receivable Is High
While you might feel generous and positive extending lines of credit to your customers, it’s all a bit pointless if they aren’t paying their invoices on time. If your accounts receivable are high but there’s no money in your account, this could be an indicator of serious cash flow problems. The problem with credit is that you are never sure if you will ever actually see that money, and a high number in accounts receivables is essentially a big pile of liability for you. That’s not to say that you shouldn’t offer credit (some businesses depend on it), but you should monitor our accounts receivables and ensure that it isn’t getting too high.
2. You Have Too Much Stock
Businesses that deal with products might like to have high amounts of stock on hand to service customer demand at once, but this can actually be an indicator for bad times ahead. If the majority of your businesses funds are tied up in stock and your customers aren’t racing to buy it all, this means you have less on hand if disaster should strike. To make sure that your company has the products it needs to grow and also has access to the cash it needs, you may need to revise your buying cycles and how much stock you want to keep on hand. If you find yourself sitting on large amounts of stock, you may be heading towards trouble.
3. You’re Overreaching
Many business owners are keen to grow their business quickly and increase their profitability, but this can sometimes lead to problems, especially if the business isn’t ready for it. If you overreach when extending your business, the chances are that a lot of your cash will be tied up in capital, operating expenses and other overheads, leaving your business much less flexible in the short term. To avoid this, all you have to do is have a thorough growth plan in place and make sure you have covered every angle. By ensuring that you will have enough capital in place to expand and cover any emergency expenses (which may mean delaying the expansion while you prepare and save), you can avoid negative cash flow problems.
4. Sales Are Dropping
There can be many reasons sales start dropping. From recession to new competition – external factors can influence your sales in a way you simply cannot control. But if you’ve been seeing a steady decline in sales over the last few quarters, there’s a good change your profit margins are being sliced thin, if they still exist. Since your overhead costs aren’t likely to change, this could spell cash flow problems for your business. You can combat this by taking a look at your brand positioning, increasing prices or switching to less expensive overheads.
5. Your Business Just isn’t Profitable
This one is a bitter pill to swallow, but sometimes businesses fail because they just aren’t profitable. If you’ve constantly been spending more money than you’re taking in since day 1, then the chances are your business model just isn’t profitable and you will experience cash flow problems sooner rather than later. If this is the case, you may need to re-examine your business model and see how it can be changed to enhance profitability.
Of course, sometimes things aren’t quite as cut and dried as this. But in some of these cases, getting some advice on how to handle your cash flow issues can be the first step towards solving them. For example, if you are having issues with unpaid invoices and high accounts receivable, then you can enlist our help in managing your debt collection efforts and get your cash flow back on track. For more information on correcting and maintaining your cash flow, get in touch with us today.