When it comes to cash-flow issues, their consequences can be catastrophic – 82 percent of businesses that fail, do so because of the poor cash flow management.
The math behind this is simple: to keep your cash-flow positive, you need to have more money flowing into your business than out of it. Otherwise, you won’t be able to pay your expenses when they are due, and you will eventually run out of money to fund your business operations.
The reasons cash-flow gaps occur can vary, but they are most often a result of a slump in sales, late-paying clients, seasonality and unexpected expenses.
To be able to prevent such a downturn, you need to try to maximize your company’s cash-flow. Here are a few ideas on things you can do to maximize it.
Know your enemy
Poor cash-flow impacts your business in many negative ways and not all of them are strictly financial. When dealing with this issue, the most common problem you can expect are:
- Restricted growth – You don’t have enough resources to surge growth, and you will most probably have to miss even the best opportunities.
- Dented credit ratings – The creditworthiness of your business will decrease, and you’ll become a risky borrower. This affects your interest rates and bank charges as well.
- Poor relations with suppliers – When constantly late with your payments, your suppliers might not want to do business with you anymore.
- Poor customer relations – When you are in need of cash, you might need to contact your customers who are late with their payments, which may get them frustrated and cause churn.
- Stress – Trying to make ends meet and collecting your debts, with all the risks your company faces, causes a lot of stress to the owner, management, and employees.
- Poor employee spirit – Employees can be worried about their future, which reflects in their productivity and overall job satisfaction.
These factors may result in insolvency and the failure of your business. Now we’ll see what you can do to prevent it.
Make realistic cash-flow predictions
To be able to keep a positive cash-flow and even maximize it, you need to do some serious planning first, in the form of the 12-month cash-flow forecast, which you will be regularly updating. While being optimistic is generally a positive trait for an entrepreneur, it can get you in serious trouble when making revenue predictions.
But if you base your predictions on your company’s historical data, or on the historical data of similar companies, your forecast will more likely be objective, and your future sales projections more accurate.
Avoid impulse spending
Once you get your budget done, stick to it. Never make any purchasing decisions before you’ve calculated how it will affect your bottom line, and consider the cost-benefit effects of any unplanned purchase you need to make.
Ensure you get paid on time
One of the best ways to maximize your cash-flow is by closing the gap between invoicing and payment. You can achieve this by establishing good practices, such as invoicing as soon as you have completed your work. If you’re working on an ongoing project which lasts longer, invoice either on a monthly basis or after a certain phase is done. You can also consider using an automated direct debit system that will collect your ongoing customers’ payments and ensure that you get paid on time.
Reduce the expenses
Expenses and costs are a regular part of business operations, but if they are too extensive, they can negatively influence your cash-flow. To maximize it, search for the ways you can minimize both the operations and overhead costs. Maybe you can outsource some of your tasks and decrease labor spending, or find a smaller office with a lower rent.
Pay bills when they are due
Delaying paying bills until they’re due can improve your cash-flow. On the other hand, to nurture good relations with your suppliers and creditors and avoid penalties, be sure you pay them on time, even on the last day when possible.
Segment your customers and suppliers
Identify your priority customers, those who bring you the most profit, and find ways to incentivize them to pay earlier. Also, analyze your suppliers, and determine whether their payment terms are competitive. You can try to negotiate with the crucial ones and see if you can get better terms, or search for another supplier if their payment terms are not competitive.
When running a business you will face many challenges, but learning how to properly handle the cash-flow is critical for your business success.