Common cash flow problems and how to avoid them

Every business needs to remember that money isn’t money until you have it in your hand. New and smaller businesses are especially vulnerable to cash flow problems, as the monthly income may be unreliable and may sometimes be lower than your outgoings. You therefore need a strategy to manage and improve your cash flow to avoid your business becoming insolvent.

Tight margins

The profits you make from your products may be too low to cover the total cost of delivering your business. This is a common mistake with new startups that haven’t fully worked out their business model. When pricing a product, do your best to factor in all the costs of getting it to market, and consider dropping it if you can’t find large enough margins.

Clients who pay late or not at all

Clients will typically try to delay payment for as long as they can – the larger the client, the more they feel they can get away with this. This can put a great strain on your cash flow, especially if the larger clients account for the bulk of your revenue. With key clients like this, try negotiating early payments in exchange for a small discount.

More serious problems can occur if clients miss deadlines or fail to pay at all. The best solution here is to prevent it happening, by checking the payment records and creditworthiness of new clients in advance. In addition, develop strong credit control practices to help you chase and recover bad debts.

Too much stock

If your business is based on you buying in stock or raw materials to sell on, it doesn’t make sense to keep more stockpile than the business can handle within a set timeframe. Unless you are anticipating a sudden massive order, try to keep only as much stock as you are likely to need before the next delivery window. This is the principle behind ‘just in time’ (JIT) manufacturing, to avoid tying up lots of cash in stock that merely sits around waiting.

If you need to buy in stock that exceeds your cash flow, trade finance (a form of short-term business credit) can be an option.

Excessive overheads

Your overheads are the expenses that are necessary for keeping the business running, but which don’t relate directly to the business itself. Examples might be literally ‘keeping a roof over your head’, paying for your IT equipment, heating and lighting bills, employing cleaners etc. Often it’s possible to find savings here.

How do I improve my cash flow?

Keeping your cash flow healthy is a constant mission. These tips are common ways that businesses save money, make money and keep payments coming in on time;

Cost your services properly

When you first start out, it’s tempting to under price yourself to bring in more business. Whether you’re underestimating your expertise or the value of your products, or you’re simply trying to lure in customers, low prices can have best payday loan Calhoun the opposite effect and harm your cash flow in both the short and long term. It’s also difficult to increase prices significantly when you start at a low level. Do market research and price yourself competitively. If customers or clients do quibble the price, be ready with reasons why you are different from your competitors. Or leave wiggle room in your quoted price to come down without injuring your margins.

Offer easy ways to pay

When your aim is to collect money, it doesn’t help if there are payment barriers in place. Offer flexible payment options by accepting cards, bank transfers, PayPal, Direct Debits and cash (if appropriate for your business). You should also make your payment details easy to find. Make sure customers are clear on your prices before you hit them with a bill they don’t expect. And if you send clients invoices, include the bank details so they’re easy to find.

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