Poor cash flow is often cited as the biggest barrier to growth and one of the prime causes of business stress and failure—for entrepreneurs, therefore, it’s no secret that keeping the rivers of cash flowing is the name of the game.
So, if you’ve outlaid capital or done the work but have not yet received a return in the form of cash – you could be in trouble.
If, however, you’ve received a return on your investment, been paid for your work and reimbursed for any outlay, you’ll be well placed to bank profits and invest in expenses or growth.
Let’s lay down the top 6 reasons you may have poor cash flow.
1) Late payments!
If you’ve spent time, money and resources completing a job – maybe it’s delivering goods or doing labour – you need to get paid pronto to avoid cash flow problems. (This is basic common sense, but especially salient for businesses that invoice customers for work completed, extend credit, or get paid after the fact.)
What can you do to improve cash flow if late payments are becoming a problem?
- Change your payment terms. This can include penalties for late payments and shorter payment periods.
- Require down payments or instalments before work begins.
- Make sure your accounts receivable software has automatic reminders built in to keep late payments front of mind.
- Weed out bad debtors and don’t extend credit to those with poor payment histories.
- Make sure you offer clear and professional invoices that have multiple popular payment options.
- Make payments easier with online invoicing.
2) Excessive overheads and unnecessary expenses
You knew this one was coming. High overheads and unnecessary expenses are a massive drag on your cash flow.
If you’re overpaying for necessary expenses, or incurring costs that can be cut entirely, you may find yourself needing to work hard to get sales in the door to cover them.
To remedy this, do an inventory of all of your necessary overheads that can’t be cut – then go and see if you can get better deals from any of your suppliers. If you can’t, then it might be time to shop around for a better deal.
Next, tally up your regular expenses, or pull a report from your accounting software. Sit down and sift through your figures with a fine-toothed comb. What can you survive without? Can you find a better replacement or workaround? Are you overpaying? Be brutal…
3) Poor stock management
When it comes to keeping your cash flow healthy, overordering or underordering stock can cause significant issues.
If you overordered, you’ll have a lot of inventory on hand gathering dust that’s not giving you a quick return. If you overextend, it can signal that you’ve spent a lot of cash but won’t see profits for an extended period of time.
On the other hand, if you underordered, you can easily miss out on sales due to being out-of-stock—you may find your business in a position of being unable to fulfill orders due to lack of necessary inventory to make a sale.
So, what can you do? At any stage in the business lifecycle, it’s essential you take a careful and diligent approach to ordering. You’ll also need to regularly report upon sales and required stock, while marking out periods of the year where sales fluctuate. Historical data from your accounting software is extremely useful here.
4) Failure to plan and budget properly
If you don’t have a living business plan that changes and breathes, you’re going to be flying a bit blind. Similarly, if you don’t budget effectively, you’re going to be caught unaware when a big expense comes or your sales falter.
You also want to be keeping an eye on the books. The best way to do that is through planning and reporting. By firing up your cloud accounting software, you can access reports like:
By keeping an eye on these cash flow KIPs (and acting accordingly) you’ll be better able to forecast liquidity issues proactively and change course appropriately.
5) Unsustainable debt burden
Debt that heavily outweighs your liquid assets may not be easy to remedy. If you’ve taken out a large loan and need to service it as a priority, this will affect cash flow.
While you certainly must pay off loans, try to make doing so a priority for your business. Make extra payments when you can and always seek to negotiate a better interest rate or terms. If you can’t find a better rate, you may be able to refinance the debt with a more favourable financial institution.
6) No rainy-day fund
When you’ve done all that you can and you face a large bill or your expenses come due, you may be in strife without the cash to cover it. By ensuring you have a rainy-day fund ready for emergencies, you can get through a tough spot and get to work building profit again.