Fix SMB Cash Flow Before It’s Too Late
Businesses fail for many reasons yet, year-after-year, market research proves that the dominant reason why most small business ventures go pear-shaped is cash flow. In fact, 60 percent of small businesses close their doors for cash flow problems alone, while one in three small businesses experience a continuing cash flow problem. So what can you do to ensure your business doesn’t travel down the same path as those unfortunate 60 percent? If you’re experiencing cash flow issues, chances are it’s for one of the reasons below. This blog takes a look at these liquidity problem areas and offers up some remedies for dealing with them head-on, before it’s too late!
1. Low-Profit Margins – The Small Business Cash Flow Killer
Small businesses can be profitable yet still suffer cash flow issues. In this regard, profits have little impact on your ability to pay your bills. However, if your profit margins are precariously low, whether due to competitive or manufacturing pressures, your gross income will take a hit, as will your small business cash flow, especially if your cost of doing business remains unchanged and those bills start piling up. One way to tackle the problem of low profit margins is to determine the actual cost of goods sold (aka COGS). This exercise will help you determine how to price your products profitability and help you ensure you’re maintaining sustainable margins. It will also help you identify which product lines may be killing your profitability.
2. High Overheads
High overhead expenses are a small businesses worst enemy and can include everything from commercial leases, vehicles, PCs, phone services, office equipment, software, IT support services, and so on. Always be on the lookout for ways to keep these expenses low. If the expense is unnecessary eliminate it, if it’s necessary, look for ways to reduce it. For example, cloud-based software solutions can help you save big on office productivity tools and all but eliminate the need for IT support services.
3. High Tax Rates
If your margins are strong and expenses are under control, yet you still feel the pinch each month, then you may want to have a word with your tax advisor. For example, if you’re a sole proprietor and operate within a certain income bracket, you might benefit from forming an S-Corporation. The structure isn’t for everyone but it could help alleviate the steep income and self-employment taxes that sole proprietors pay. As a guideline, if you make between $80,000 – $100,000 in bottom line profit then structuring your freelance business as an S-Corporation might be worth considering. For other business entities, look for ways to maximize your tax deductions and available tax credits. Consult your CPA or tax advisor to make sure you maximize your tax returns.
4. B2B Sales that Suck Up Your Cash
Sometimes you just have to offer trade terms to win that big deal. Nevertheless, those NET 30-60-90 terms may wreak havoc with your cash flow, especially when these clients don’t pay on time. You may have the most profitable business in town. Yet if you have a pile of unpaid invoices sitting on your desk, then it’s time to take action. Here are some ways to tackle the problem of unpaid invoices:
- Securing purchase order financing sources in advance;
- Improving your collections process;
- Offering incentives for early-paying clients;
- Receiving payments electronically, as opposed to by check;
- Running a credit check before extending trade terms;
All of these tactics can help speed up the payment process and avoid getting taken for a ride by late-paying commercial clients.
If you need a PO financing source or an immediate remedy to timely cash flow crunch, consider services like those offered by Fundbox:
- Online Invoice Financing lets you advance payments for un-paid invoices
- Fundbox Business Line of Credit gives you a revolving line of credit for your business.
5. A Fully-Stocked Warehouse
Tied up your cash in inventory that you can’t shift? That’s the genesis of a cash flow problem right there. Aside from having a blow-out sale or reducing your prices to shift inventory, keeping your warehouse leanly stocked so that you can meet demand, is your best remedy. If you’re investing in a new product line, limit your quantities until you can truly gauge demand. If the new product proves to be popular, let your customers know that you’ll contact them when the item is back in stock (also a useful ploy for getting their contact details for future marketing). You can also offer a little something extra for their patience. Alternatively, don’t purchase inventory until you have a confirmed order from a customer (useful for online businesses or those that don’t rely on visible merchandising to shift stock).
In conclusion, with a bit of planning, small business can avoid cash flow gaps. The message here is that with a deeper understanding of your business dynamics you can solve most of these challenges long before they hit you. Can you add your own ideas on how to predict and solve these problems?
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