According to the Small Business Administration, 96% of businesses will fail within 10 years. This number is primarily attributed to lack of working capital and poor cash flow management.
The following are the four factors that are most often at the root of cash flow problems, as well as advice on how to avoid or overcome them.
1. Not Paying Attention to Expenses - Many businesses end up in a cash flow crunch due to unexpected expenses (for example, costly repairs to equipment, replacing malfunctioning technology or a natural disaster) or too much money going out each month (such as ongoing expenses that have quietly crept up to an unsustainable level). Resolving a cash flow crisis requires that business leadership take a renewed, vigorous look at their ongoing cost structure. Every business owner should have a rigorous process in place to track expenses on a monthly basis and project future expenses for the months ahead. A good business accountant can work with you to make sure you have an eye on the overall health of your business cash flow and are better positioned to anticipate challenges as they arise.
2. Uncertainty about Future Cash Flow - Some businesses are so caught up in the day-to-day grind of getting work done and paying bills that they don’t take time to anticipate what's coming in the next few months. Maintaining healthy cash flow requires a long-term vision. Most accounting experts recommend that every business maintain a six-month cash flow projection with expected revenue and expenses, while also adjusting for any seasonal peaks and valleys.
3. Slow-Paying Customers - Many cash flow problems are caused by a delay in receivables, such as when a company’s customers or clients are slow in paying their bills. Far too many companies allow their customers to become delinquent in paying them, often without fully realizing the problem until it is having a major impact on their cash flow. Business owners need to put consistent policies and procedures in place to ensure that customers pay in a timely fashion. It's especially important to clarify your payment terms and expectations on every invoice, whether that’s “payment due within 30 days” or “payment due upon receipt.” Don’t assume that your customers automatically know what to expect be clear about when you expect to be paid for your products or services.
4. No Plan for Collections - There comes a point when a slow-paying customer turns into a delinquent customer. What then? Many businesses do not have a standard process in place to collect on unpaid bills. It doesn't have to be complicated or time-consuming; it’s often a matter of scheduling collections into the overall sales process and making it part of ongoing daily business operations. Sometimes customers are slow in paying because you haven’t reminded them the money is due. It’s unfortunate that business owners need to remind customers that they owe money, but sometimes that little push is all you need to collect outstanding funds.
Cash flow can make or break a small business's health. More often than not, maintaining it is a balancing act between credit and cash on hand, and it's a tricky tightrope to walk. As your business begins to grow, this intricate balance has the potential to become even more complicated. Especially if you're relying on big clients or irregular payment cycles, your cash flow can become unpredictable. As the numbers grow, so do the stakes and the best possible asset you can have is a plan.
With a proper accounting of all your possible expenses throughout the year, coupled with your anticipated revenues, it's possible to project how much cash will go in and out of your business on a day-to-day or week-to-week basis for the next year.
Several templates for cash flow planning are available online, but you can easily make your own. To prepare your own cash flow forecast, begin by projecting cash inflows, being sure to base your numbers on when the cash will reach your business, as opposed to, for example, counting a customer's credit card payment the day of the sale. Then, include all expense variables for the same time period. Finally, add the projected bank account balance at the beginning and end of all of those transactions.
The result should be a clear picture of how much cash will enter and exit your business during any given time period. A good cash flow projection can help a small-business owner know when to make major purchases, when to set funds aside, and, in general, how to keep a healthy amount of cash flowing through the business at all times.
Cash shortfalls happen. The month you need to pay out for a ton of new inventory could be a naturally slow month for revenue; the need for major repair work could fall in the same month half of your employees worked overtime. Whether they are due to a slow season, lagging client payments or unanticipated expenses, cash shortfalls are survivable if small businesses look ahead and act early.