Most small businesses have periods of feast and famine, so cash flow highs and lows are common. Fortunately, you can prevent most cash flow problems with foresight and the right strategy.
Here are some common cash flow blockages and ways you can solve them.
1. Late payments
Overdue payments are the biggest risk to small business cash flow, so it’s in the owner’s best interest to apply best practices for billing. This means using cloud-based software and electronic payment solutions, which provide invoicing tools that save time and optimise cash flow. They allow you to offer multiple forms of payment and quickly follow up with clients by giving you easy access to invoice records and reports.
2. Slim profits
Small businesses, particularly start-ups, may sell products and services at prices so low that they end up with tight or even negative profit margins. This often happens in highly competitive environments with strong pricing pressures.
So how can you avoid this scenario? Regularly auditing your products and services is key, as it helps you determine the all-inclusive cost of providing them. Once you know how much they cost, try the following:
- Where possible, raise the prices of products or services with weak margins
- If you can’t raise prices, consider dropping products or services with weak margins
- Ensure all proposals price your products and services according to their cost
3. Excess stock
Are you holding too much stock? If so, consider offering discounts for bulk orders or old stock that you may otherwise need to write off. You can also hold online auctions, which can attract multiple bids and therefore increase the net amount realised. You can also free up cash from your fixed assets by selling or renting out unused or underutilised equipment and property, including for example:
- Company cars or delivery vehicles that aren’t used regularly
- A storage unit that’s less than half full
- Machinery that’s no longer used in the production process
- Vacant office or factory space
4. High overheads
Overhead expenses are the costs of running a business that are not directly tied to selling a product or service. Examples of overheads include rent and costs related to equipment and utilities. Every business should regularly audit expenses and cut back where they can – but be careful not to cut too much and risk compromising your business’s operations.
5. Bad debt
Bad debt occurs when you sell products or services to a client who does not pay. You can avoid bad debt by reviewing the credit of your clients before you extend payment terms. Provide terms only to clients with solid payment records or references. Others should prepay until they have a track record with your business.
6. Tax crunch
Tax filing itself isn’t a cash flow issue, but if you don’t file correctly or on time, you may incur interest payments, penalties and time-consuming audits. If you can’t stay on top of tax deadlines, consult a tax specialist. They can help you prepare your taxes, file on time and find potential tax deductions.
5 more great cash flow articles for you to read:
1. The 7 worst cash flow mistakes
2. How to secure a small business grant
3. Small business = big economic impact
4. The 9 most popular sectors for start-ups
5. Does accounting software improve cash flow?