There is no doubt that cash flow is very important. However, how much power does it actually have? Well, cash flow problems kill businesses. According to studies, nine out of 10 small businesses fail because of their failure to manage cash flow properly.
Cash flow management is not complicated. Basically, it means making sure money goes into your business as fast as possible and goes out as gradually as possible. Also, it means keeping the future in mind and implementing actions to ease any possible problems that may arise along the way.
Of course, everything is not easy, that’s why there is a high rate of business failures due to cash flow issues. If you don’t want to become another statistic, here are 7 ways to avoid cash flow surprises:
1. Profitability Does Not Translate to Cash
Money-making businesses are just as likely to fail due to cash flow problems as businesses that are not making money. You can quickly compromise your business if your costs are excessive or you are spending the profits of your business.
2. Forecast, Forecast, Forecast
Gather as much foreknowledge as you can relating to when cash is expected to go in and go out the business. For this, you need cash flow forecasting. The benefits of having a cash flow forecast is to assist you in making sense of your future cash circumstances and help you identify any surprises and do something to avoid them.
3. It only becomes revenue when it is already in the bank
You may have a balanced monthly budget and a great P&L statement, but if you don’t get paid by your clients in time for you to pay your monthly bills, then you may have issues with cash flow, though short term.
4. Learning about Seasonality
Cash flow is heavily influenced by business seasonality. If you operate a seasonal business, a lot of your inventory purchases, employee expenses and other outgoings are incurred before you make a sale. Make plans beforehand and study trends carefully so you will know when business is up and when it is down. This will help you manage your stock and employment expenses better.
5. Be Prepared for Surprises
Your bottom line can be affected by unplanned expenses and emergencies like a natural disaster, the loss of your star salesperson, illness, etc. Plan for the unexpected, whether it is business insurance, a financial cushion, or cross-training of key sales staff.
6. Have an efficient invoicing and collections systems
Small businesses have problems with clients who don’t pay on time. Take a look at some of these figures:
- Just 50% of businesses pay on schedule (D&B)
- 64% of small companies said that invoices are left unpaid for no less than 60 days (NFIB)
- 14% of small companies listed late payments are the No.1 problem (Kauffman Foundation)
There are several ways to solve this problem, including being prompt in sending invoices out, arranging invoice reminders, and practicing an effective invoicing system. Follow up with payments as soon as you sense that they will be delayed.
7. Be Prepared for Expansion
Growth is accompanied by extra expenditures – marketing campaigns, equipment, inventory, and so on, Be ready for growth, without putting your cash flow at risk, by learning to deal with challenges that hinder business expansion, including cash.
Don’t let your business be impeded by poor cash flow management. Enlist the help of professionals for setting up a good invoicing system for your business. PJS Accountants provides a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning and bookkeeping. We have spent more than 30 years dealing with local businesses in Capalaba, Cleveland and the Redlands. Our team is always available to take your call and assist you in whatever business needs. For enquiries, contact PJS Accountants.