Most business owners struggle with cash flow. This is especially true with new and with growing businesses. As long as you are growing, cash flow can be a challenge – if you double in sales, you could double in cash requirements. Last year’s profit probably won’t be enough to cover your new cash needs.
To understand your cash flow issues, you need a proper cash flow statement. If cash flow from your operations is negative, you should take a deeper look at your underlying business issues. The following scenarios can result in negative cash flow from operations:
- Sales are not high enough.
- You are undercharging for your products or services: Do a pricing and costing review to determine if you are charging enough for your products and/or services. Check your competitors’ pricing and your profit margins.
Your business expenses are too high. Are you managing your expenses well? Have your expenses increased over the last 12 months?
- Aging accounts receivables. If your clients are not paying on time or your credit terms are too long this will develop cash issues. Some solutions include to take a deposit upon sale, invoice immediately upon completion, offer incentives for paying on time or encourage customers to pay using a credit card. If collections are an issue, consider outsourcing to a professional.
- Analyse your inventory. Do you have the right product mix? Is your inventory turning fast enough? Discount any slow sellers to move them out the door. Consider an inventory management system.
If your cash flow issues are not arising from operations, look at your capital structure to see if you need more bank financing and/or equity. A growing business requires cash to finance increases in receivables, inventory, expenses and capital expenditures.
Cash flow is one of the major causes of failure in small business. In order to prevent cash flow issues, you need to develop an accurate cash flow forecast. Take into consideration seasonal fluctuations, price increases, and late payments. Be conservative and realistic. Determine what sales level you need to make every month to cover your cash outflow requirements. If you are not achieving this, develop a strategy to increase your sales.