Why Your Business is Having Cash Flow Problems [6 Suggested Solutions].
Why Your Business is Having Cash Flow Problems [6 Suggested Solutions].
discover | Thursday - 23 / 05 / 2024 - 12:02 pm
Perhaps the most serious mistake startups make is confusing sales with cash flow. As long as reports show positive numbers, startup management may believe their business is on the right track.
Sales don’t always mean cash in your bank account! When all your money is tied up in inventory management, overhead expenses, unpaid bills, and operating expenses, you end up with no cash in hand.
Cash flow problems can be a major headache for you and your accountants alike, but by understanding what to focus on, you give yourself a chance to make the right decisions before it’s too late.
Here are seven common causes of cash flow problems in businesses:
Late Payment of Invoices (or Non-Payment Altogether!):
At the beginning of this post, I and you agreed that, sales are different from income (you probably remember that, don’t you?). Income is not considered income until it enters your bank account. Unpaid accounts receivable is one of the biggest cash flow problems you can face. When payments are late, your ability to invest is delayed – and you may miss certain investment opportunities -.
- Shrinking Profit Margins:
Even a small pricing error will undoubtedly hinder cash flow without you realizing it.
Profit margins shrink for several reasons, and two product-related reasons are among the most common; first reason is “pricing your products too low” and second is “not selling enough profitable products”. This can also be an indicator that expenses are too high, which I will discuss in a moment.
Lack of Liquidity Margin:
The ability of your business to adapt to changing market conditions is strengthened by having a strong cash reserve. Conversely, a lack of cash reserves can cause serious business friction (disruption) during difficult times. Unfortunately, most small businesses do not have good cash reserves.
Underestimating Expenses:
We often see businesses facing cash flow crises simply because they have misunderstood the market. In other words, all their expectations were wrong, and revenue was lower than expected.
This may be beyond their control, as in cases of market volatility, inflation, and resource scarcity.
If your expectations are not accurate, you will end up with a large inventory that you cannot get rid of, or you will end up hiring more employees than you need.
All of the above means unjustified increases in expenses.
Overgrowth:
Just like overselling, excessive business growth can bring about numerous problems. For instance, it can lead to increased overhead costs, a rise in debt, the need to invest in new assets or employees, and challenges in inventory management.
And if you focus on potential profit at the expense of actual cash flow, you might just cross that “point of no return” amidst all this excitement!
Excessive Inventory:
Some of us possess a certain “hoarding” mentality that tells us it’s okay to have a large stockpile on hand so we can keep up with market demand when the time comes. But every item sitting in your warehouse costs you money: general storage costs, employee wages, and potential spoilage. In general, the more inventory you hold, the more these things accumulate. Eventually, you’ll reach a point where you have too much, and you can’t get rid of it fast enough to recoup the losses, leading to cash flow problems.
Mismanaging Expectations:
We’ve all been there: when you start a new business venture, enter a new market, or launch a new product… During all of that, it’s easy to overestimate your profit expectations!
But profitability takes time. And if you don’t manage your expectations well, you might end up spending cash you haven’t earned yet on further development, causing a bottleneck in cash flow funnel.
We Suggest the Following Solutions to Common Problems, Specifically Those Related to Cash Flow:
If cash is king, then cash flow is the kingdom. And the king remains king as long as the subjects continue to pay their taxes. Similarly, your business cannot survive in the market without cash flow to support it.
It may be too late to prevent cash flow problems; now you just have to clean up the mess.
We have designed the following tips to help you deal with cash flow problems as quickly as possible:
Get a better vision of the business:
Good organizational vision is essential to stop losing cash flow due to problems such as large inventory or slow inventory turnover. Invest in a system that gives you a comprehensive picture of your business. Logix inventory management system can help you map out your entire production pipeline and cost, starting from the supply chain to shipping. Comparing data from your different operations will help you determine your cost of goods sold (COGS), and it will also help you reduce inventory costs.
Enhance your capabilities of prediction:
When it comes to preparing your business for a changing market, forecasting is your greatest ally.
While you can’t predict every possible minor issue, you can prepare for most of them. Consider implementing a system that can ensure accurate forecasting of your inventory and purchasing needs. Be proactive in identifying seasonal market trends, sales patterns, and warning signs.
If you know what’s coming next, you can make sure you have the right amount of inventory, whether that means increasing or decreasing it.
Master the management of your profit expectations:
Do your best to eliminate emotion and focus on making rational, logical, and well-considered decisions backed by research. It’s easy to get excited when your sales numbers start to grow, but don’t let your enthusiasm influence your choices.
Gather sufficient information about your business as well as from broader market research. Data is the evidence, and evidence is the key to making smart decisions.
Reduce Expenses:
Here are some quick ways to reduce your expenses:
– Eliminate any subscriptions or services you don’t use.
– Negotiate better prices from suppliers (or switch to new ones).
– Get rid of unnecessary operating costs and sell off useless equipment.
– Reduce overhead costs by getting quotes from multiple service providers.
Avoid Overextending Yourself:
Growth is undoubtedly the goal of any business, but not at breakneck speed.
To avoid growing too quickly (and therefore running out of cash), you need to develop a growth plan for your business. This plan should answer the following questions:
– What are your key performance indicators (KPIs) for cash flow?
– How will you expand within your existing market? Will you move into a new market?
– Will you need new office space or equipment?
And if you believe your potential growth is worth some short-term cash flow challenges, plan for it:
– Identify expenses that can be cut back.
– Which financial institutions offer the best terms for a short-term loan.
– How much cash reserve can you build up.
Accelerate your debt collection process:
The best way to minimize your cash flow problems is to make sure that cash is not tied up for long periods in overdue payments. This relies primarily on having good customers who pay on time, but there are a few things you can do to help.
Here are some quick tips for getting your dues:
– Don’t delay issuing invoices to customers.
– Keep accurate records so you can track the status of your invoices and due dates.
– Make it easy for your customers to pay by accepting multiple payment methods.
– Break down large invoices into smaller installments.
– Stop doing business with a delinquent customer until they pay their bill.
– Encourage early payments through discounts.
In conclusion,
The cash flow statement is an important tool for understanding the financial health of a business. By providing information about the flow of cash in and out of a business, this information can be used to make informed decisions about future investments, financing, and budgeting. This is what Logix financial management system provides.
