One of the most important gauges of your financial health is cash flow. Just like the flow of blood in your body, when there are blockages, it can be fatal.
Small business owners often ask me, “How come I’ve made a profit but I don’t have any cash?” If this sounds like you, it’s time to look more closely at the causes. Knowing the causes can help you develop effective cash flow management in order to maintain a healthy business.
The six cash flow killers I see most often are:
1. Low profits, decline in revenue
A cash flow problem occurs when money coming in is declining but outgoings are still payable, e.g. rent payments, staff wages, supplier payments, stock and so on.
2. Unexpected or rapid growth
Isn’t rapid growth a good thing? It is, but not if you are taking on new customers while waiting for existing customers to pay.
3. Buying too much stock
When you buy too much stock two things happen, it ties up cash because you are not making up for costs, and there is a risk you won’t sell all the stock.
4. Too much customer credit and slow paying debtors
This is a domino effect. While you are waiting to be paid you still have to pay your suppliers. As a general rule, 70 percent of your debtors should be paying in 30 days. The solution may be to offer a discount if a customer pays faster than the standard 30 days.
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Overtrading, which leads to cash flow problems, refers to over extending yourself and taking on more work than you have capacity to fulfil. This especially happens to soloists and microbusiness owners.
6. Increase in expenses
Getting to the heart of your cash flow problems is vital for the long term success of your business. In many cases, issues can be solved with the right financial strategy. If necessary, seek help, because the sooner you act the sooner you’ll get back on track. Don’t let cash flow problems kill your business.
What are your top cash flow tips?