‘Cash flow problems’ is a phrase that can strike terror into the heart of any business owner. Any entity, large or small, can be sunk without careful management of cash flow. That’s why it’s so crucial to stay on top of your cash flow and to make sure you’re comfortable with how it functions within your business. Most of all, you need to understand what the main causes of cash flow problems are – and how to avoid them.
Bad debts and late payments
This might be the most significant cause of cash flow problems. Bad debts can really undermine a business to the point where it can’t survive. Unpaid invoices and clients or customers who consistently don’t pay on time can have a seriously negative impact on your cash flow. When it comes to meeting your own payment obligations, you need to have cash in the bank to do it, so don’t allow others’ missed payments to hold you back. If you have customers who consistently miss paying you when requested, you may have to ask yourself if it’s worthwhile to continue doing business with them.
Inflated overheads and costs
Particularly at the start of the life of a business, it can be easy to find reasons to spend big. But do you really need an office if you don’t have a sizeable workforce and could you spend less on packaging? Marketing, shipping, office space, travel and tech – if you’re bootstrapped but you want to start generating strong cash flow then these costs need to be minimised.
However your business makes its income, there needs to be something coming in to the company in order to avoid cash flow problems. So, if you’re reliant on sales then focusing on driving these can help to avoid running into issues. If your business is subscription based then building a bigger bank of subscribers will keep you on the right side of the balance sheet. Keep your cash flow in the pink by making sure your income is too.
Cash tied up in products
The most challenging balancing act for product-based businesses is releasing the value of cash that is tied up in inventory. If you have thousands of pounds of stock going unsold then your cash flow stops moving. Until the cost of that stock is recovered by selling it you’ll continue to experience problems. Don’t make too much of an investment in inventory up front if you want to avoid cash flow issues.
Too much debt
Debt can play an essential role in helping to get a business off the ground. However, an imbalance of debt can leave you struggling. The key is to avoid a situation where just servicing the debt every month is seriously impacting on your cash flow.