You’ve heard the saying “cash is king”, and as a business owner you can attest to that from your own experience running a company.
Receiving payment for a sale of your products and services is not difficult. The real problem is when. If only you can collect payments instantly after you have made the sale, you would worry less about cash flow.
However, this is not the case in actual practice. Sometimes you get paid 15 or 30 days after you deliver a product or a service. The worst customers even delay the payment for 90 days.With this set-up, a few businesses may appear to be making unimaginable profits yet in reality, they are suffering from poor cash flow.
With this set-up, a business may be making unimaginable profits yet in reality, they are suffering from poor cash flow.
How can a business have profits yet experience poor cash flow?
Quite simply, the profit or loss of a business is calculated as the total income minus expenses.
The income is recorded at the time the invoice is generated. Expenses are documented when they are incurred, regardless of whether they have been paid. A profitable business may have a negative cash flow if there are high accounts receivables (customers owing you money) and large inventory levels on hand waiting to be sold.
Besides these, tight supplier payment terms and the requirement to service debt greatly affect cash flow. Under these conditions, a profitable business will suffer severely from cash flow constraints.
For growing businesses, the strain on cash flow is amplified. Consider that you have attracted many new clients, and as a result, your revenue has doubled. The increase in sales would be putting further pressure on cash flow due to the additional costs incurred in labour and inventory to make that sale. The delays in receiving payment for the sales will further worsen the cash flow problem.
There’s a term for this – Growing Broke
For most small business owners owners, growth is a common goal. However, rapid growth can create volatility and hinder cash flow in unpredictable ways.
When a business grows too rapidly, you risk compromising the quality of the product or service you provide. Workers are forced to cut corners to meet production demands. In the process, they make more mistakes because they are pressured to work faster to keep up with a higher sales target.
For example, you want to raise the sales volume of a particular product or service. Workers need great attention to detail to maintain a certain standard of quality. With your current staff, your can generate 100 pieces of a certain product on average but if you push for a higher sales volume, say to 1,000, you cannot guarantee that they will be done with the same level of excellence.
What measures can you take to control your cash flow?
Here are a few proven tips to smooth out your small business cash flow:
- Put a system in place to measure and predict the cash position of the business on a weekly basis. This is one of the most overlooked parts of managing a business. Make educated cash projections based on the financial data you have accurately gathered.
- Plan for anticipated cash shortages. Contact your bank early for a line of credit or overdraft facilities before a crisis strikes.
- Negotiate longer payable terms with suppliers. If you have been a good client to them, they will be willing to extend the terms. They have a vested interest in keeping you in business.
- Review the profit and loss for those unnecessary expenses that can be reduced or removed. You’d be surprised that there are tons of ways you can cut costs and run your business as lean as possible.
- Implement strict accounts receivable policies. Most businesses have upfront payment collection and impose cash on delivery to slow-paying customers.
- Invoice regularly and offer multiple ways to make it easy for customers to pay. Timely invoicing and simplifying payment will pay off.
Is your business growing broke? If not, this is the best time to implement these changes in your cash flow management. And if you need assistance, seek a trusted accountant or a business advisor to help you handle your cash flow challenges and plan wisely for the next few weeks, months, or even years.