How important is cash flow to small business success? You might want to ask the 9 out of 10 small businesses whose ventures failed because of cash flow issues. Yes, that’s right. 90% of small business failures can be put down to bad cash flow management (D&B). That’s a very worrying statistic.
So cash flow matters. Regardless of whether your company is turning a profit or not, without cash in the bank your business can’t pay its bills.
The concept of cash flow management is a basic one; it means doing everything possible to ensure money is coming into the business as quickly as possible and exiting it as slowly as possible. You’ll also need to keep an eye on the horizon so that you’re not surprised by an unexpected cash outlay.
Sounds simple yes? Actually it’s a balancing act and takes some time to perfect. Here are seven pitfalls to avoid and best practices to adhere to that can help you avoid becoming just another statistic.
1. Don’t Confuse Profitability with Cash
This is one I hark on about a lot. Even profitable businesses close their doors for cash flow reasons. If your costs are high or you’re reinvesting your profits back into your business then you can quickly come up short in the cash stakes.
2. Have a Long-Term View of Your Cash Flow
It’s vital that you understand your cash commitments and monies owed. This is where a cash flow forecasting exercise can help. Not only will it help you understand your cash situation down the line, but you’ll be able to spot any potential surprises that might impact cash flow.
3. Don’t Count Income until it’s In the Bank
Your monthly budget may be balanced, and your P&L statement looks great, but if your recorded income doesn’t exchange hands before your expense payments are due, then you may have a cash flow problem, albeit short-term.
4. Understand Your Seasonality
Seasonality has a big impact on inventory and staffing, one minute you need it next you don’t. Plan ahead and analyze trends closely so that you can pinpoint highs and lows and manage your stock and hiring accordingly. Check out these tips for surviving business seasonality without cash flow problems.
5. Plan for the Unexpected
Unplanned for expenses and emergencies strike businesses all the time. Perhaps you fall ill or have an accident and can’t run the show for an extended period. A natural disaster may strike that causes damage to your business. Your star sales person might quit unexpectedly. All can create cash flow problems. Look for ways to cover your back and plan for the unexpected. Get business insurance, mentor a staff member so they know how to take on key functions if you or another employee leaves, and so on.
6. Practice sound Invoicing and Collections
Take a look at just some of the statistics out there on how long small businesses have to wait for payment:
- Only half of companies pay on time (D&B)
- 64% of small businesses report having invoices go unpaid for at least 60 days (NFIB)
- 14% of small businesses cite late payments are their biggest concern (Kauffman Foundation)
One way to reduce this burden is to invoice promptly (as close to the sale as possible) and practice good invoicing hygiene (check out these tips). Then make sure you are collecting and chasing payments as soon as it looks like your payment terms may be in jeopardy.
7. Be Prepared for Growth
With growth comes additional costs – inventory, equipment, marketing campaigns, etc. If these outgoings exceed your income, then cash flow becomes a problem. Check out these tips for breaking through some of the barriers that impede small business growth, including cash.
Ready for more?
Apply for funding and find out if you qualify today