Customers are clamoring for your product or service and your business’ sales are up, but does that mean all’s well with your business bank account? Not necessarily. Here are five warning signs that your company might be headed for cash flow problems.
Your business is growing too fast. Rapid growth might sound like a nice “problem” to have. In reality, though, growing faster than you expected or planned for can lead to serious cash flow problems for a small business. Growth typically means you will need to hire more employees, expand to a bigger location or manufacture more products to support your new customers. All of these changes require more money, but if the income from business growth isn’t enough to support the new expenses, you can quickly find yourself in a cash crunch.
Your receivables are out of whack. Are your customers paying slower than they used to, paying late, making partial payments or not paying at all? Any of these changes can put you into a cash crunch—especially if it’s an indicator of industry-wide financial troubles among your clients. Monitor your receivables closely on a regular basis. Set up systems to remind you when receivables are due; then reach out to customers to follow up as soon as the payment isn’t received. This not only helps you get paid faster but also keeps you abreast of bigger problems, such as a key customer who starts having financial problems.
You aren’t managing your payables wisely. While you should try to accelerate payments from your customers, paying your own payables early is a big mistake. Instead, try to delay your payments to vendors as long as possible so you can keep the cash in your bank account and working for you. Use automatic payment tools such as direct debiting to ensure you don’t miss a payment deadline (and hurt your business credit score), but set them up to pay on the deadline or the day before, not two weeks ahead of time.
You don’t have adequate working capital to provide a cushion in case of emergency. Perhaps your cash flow is doing fine now, but what would happen if a big customer suddenly left you or stopped paying on time? Getting a business line of credit is a smart move to provide backup in case of the unexpected. (Be sure to apply for the line of credit before you need it.
You don’t monitor your business’s cash flow. There’s no excuse today for not staying on top of your cash flow. If you use accounting software, it’s easy to generate financial reports and view your financial statements at a glance so you can spot problems and get out in front of them. Some business owners review their cash flow every day; others do so once a week. The right timing for you will depend on your financial plans, but whatever you do, don’t be an ostrich with your head in the sand and never monitor cash flow at all.