On occasion, your business will find itself in a cash flow crisis. Maybe you have too many unpaid invoices and your clients aren’t paying on-time. Or maybe you are completely disorganized and need to get the fundamentals of your business under control.
At the end of the day, having poor cash flow can literally put you out of business. And truth be told, it’s one of the biggest reasons why as many as 25% of companies do not survive for longer than one year.
Are you starting to recognize the seriousness of this problem? Let’s take a look at some potential problems and come up with solutions that are easy to implement.
6 Potential Cash Flow Problems and How to Avoid Them
First, a proper definition of cash flow is the money coming in and going out of your business. Businesses often measure cash flow based on set periods including monthly cash flow, quarterly cash flow, and annual cash flow.
Some ways to avoid potential problems include:
- Are your books disorganized? – Unfortunately, many new businesses do not focus on bookkeeping when first starting out. They push bookkeeping activities to the backburner. This is especially true when a company starts out busy and has more work than they can handle. Instead of letting bookkeeping issues get out of hand, tackle them immediately and prevent future cash flow problems from ever starting.
- Do you have bad debt? – Bad debt is another reason why businesses will find themselves in cash flow crises. To reduce bad debt, when bringing new clients into the fold, run credit checks prior to offering credit terms. If a business has a poor credit history, only work with them if payments are made upfront for services rendered. When all else fails, hire a debt collection service to collect past-due invoices.
- Are your credit terms out of sync? – Negative cash flow will become a problem if customer credit terms and vendor credit terms are out of sync. As an example, let’s say you offer a customer net-30 credit terms. But the supplier that you use to help service this vendor only gives you net-14 credit terms. This is obviously out of sync and can easily create a negative cash flow problem. Either convince your supplier to give you net-30 credit terms, or tell your customer that you can only offer net-14 terms for the foreseeable future.
- Do you have profit problems? – If your company lacks profits, you should obviously expect to lack cash flow. Bring in new business to correct this problem quickly before your business goes under.
- Are you cash flow forecasting? – For new businesses, cash flow forecasting is a necessary step. Talk to your accountant about creating this forecast on your business’s behalf.
- Are you growing too quickly? – Everybody wants their business to grow as fast as possible. This can actually be a problem sometimes. If you grow too quickly, potential cash flow issues will arise. To prevent this concern, ask your bank for a line of credit. If that doesn’t work, see if you can obtain a short-term loan.
Cash flow problems do not need to overwhelm your business. Prevent potential business destroying crises by recognizing potential cash flow problems and take the necessary steps to avoid them.