Cash flow problems affect most small and medium-sized firms at one time or another. For some it’s nothing more than a blip, but for others it can signal the beginning of the end as credit tightens and the business folds.
But what causes cash flow problems for businesses? Understanding the reasons for your sticky cash flow is a vital step to solving the problem. For those just starting out and writing a business plan, knowing the most common causes could help avoid the situation in the first place.
The most common causes of cash flow problems
Perhaps, the biggest cause of cash flow issues is very basic – your business is simply not generating enough sales, or there is not enough margin on what you’re selling. This crimps profits and puts your business in a financial strait jacket where the only way out is to sell more, and quickly. All too often it’s a bad business plan that is to blame.
Another problem affecting many small businesses that haven’t drawn up a sound business plan is the question of profitability – does your core product deliver the profit it ought to for you to survive and then grow? For many firms, the problems with cash flow can be traced back to a weak business plan that failed to build in enough profit so the money is slowly squeezed from the firm, suffocating it to death.
Sometimes expenses can get out of hand, particularly when you’re setting up a small business and are keen to invest in the future. Too much investment in the future can make for some serious cash flow problems in the present. Again this comes back to having a good, sound business plan so you know exactly what you’re spending, how much and why.
Too much stock building up a warehouse can be a killer for cash flow. It’s dead weight that’s losing you money all the time – all the excess stock is cash that could have been used for other, more profitable purposes.
Lack of Visibility
Many small business owners struggle to really gain a handle on their incomings and outgoings and don’t even realise there is a cash flow problem until it’s nearly too late. Technology can help, but ultimately this begins with a clearly-defined plan as to how to gain visibility of finances.
Late payments are a big problem for small businesses, but one way of easing the pressure is to build in discounts into payment terms to encourage prompt payment. You may also want to seek out better terms with your own suppliers, or find ways to stretch payments.
Image from Wayne Stadler published under Creative Commons