What’s one of the most frequent reasons for small business failure?
According to a U.S. Bank study, a whopping 82% of businesses that fail do so because of cash flow problems. Remember that cash flow doesn’t just mean the amounts of money that are coming in and out: it also involves timing. So how can you fix your cash flow problems?
Get Invoices Out Promptly
You're not going to get paid until you send out the invoices.
Speed up cash flow by sending out invoices as soon as products are shipped or a job is completed.
Proactive Tax Planning
Incorporate tax forecasting into your cash flow management strategy by understanding your tax obligations.
a. Set aside tax money every month. It may be tempting to use all of your available funds to run your business or grow it, but at tax time you may not have the funds to cover your tax bill. So, save money needed for taxes.
b. Tax forecasting helps you keep pace with your projections throughout the year. Revisit your projections frequently to ensure that your tax projections match your revenue.
c. Get help and consult a tax professional to help you. Business tax codes are frequently changing and a tax professional is able to explain and guide you.
Organize Your Financial Books
Unorganized financial records may not provide you with reliable records in order to run your business. Review your invoicing system and the methods of collecting payments from your clients and documenting payments received. Organized records may help you stay on top of your cash flow.
Out of Sync Credit Terms
If your credit terms with your customers are out of sync with the credit terms set by your suppliers a negative cash flow may develop and may build up over time.
For example, if your clients have 30 days to pay but your suppliers are paid within 14 days, a cash flow problem could easily arise.
If an out of sync negative cash flow does develop, try to renegotiate the terms with your clients or suppliers if possible.
Problems with Profits
Some businesses have seasons when they are busier than other times of the year, think of a lawn maintenance company around hurricane season, the landscaper is usually much busier than during the winter months when the maintenance is less intensive.
Some business owners rely on a cash reserve to help them get through slow periods. Consistent periods of losses may impact your cash flow. It is important to your business to determine the reasons for the losses, it may be time to implement better control over expenditures or increase your prices as a possible solution to problems with profits.
Lack of Cash Flow Forecasting
With a cash flow forecast, you’ll be able to see which months you can expect to see a cash deficit, and which months you can expect a surplus. You’ll also be able to get a pretty good idea of how much cash your business is going to require over a period of time.
You can gain a lot of insight into your business by comparing actual figures to what you forecasted. If you see discrepancies between the two numbers, dig further to see what might be happening.
For example, if you discover that you are spending twice the amount you thought you were on electricity then you could look at the efficiency of your air conditioner or other areas to save energy.
When finding discrepancies, you can adjust your forecasts so they are more accurate going forward.
Growing too Quickly
When your business is growing, watching your cash flow is important as it’s vital to make sure that your receivables are able to cover the additional expenses involved with growing such as increased inventory, materials, additional staff and more. If you are affect by a cash flow problem due to growing quickly, you may consider a short-term line of credit that is paid back quickly so that you have less interest to the bank.