Cash flow is an essential ingredient for running your business. Like fuel to an engine or batteries to a phone, having positive cash flow is necessary for growing your business and achieving long-term success. Understanding your business’s cash flow can help you manage your business funds effectively.
If you don’t manage your funds effectively, you’ll run into cash flow problems that can get your business into trouble. In fact, 3,580 Canadian businesses filed for bankruptcy and other insolvencies in 2018, with cash flow problems being a large contributor. If you’re concerned that cash flow issues are preventing your business from growing, don’t worry. There are ways to address these issues and we can help. Here’s a list of 6 major cash flow problems you should avoid and 6 solutions you can execute to scale your business properly.
1. High operating expenses
Problem: Your operating expenses are too high. Running a business isn’t cheap. There are many operating expenses you incur in order to keep your business running smoothly. Some of these operating expenses include:
- Inventory and supplies
- Employee payroll
- Rent & utilities
- Telephone & internet service
- Website domain costs
- Other operating expenses
Paying for operating expenses doesn’t feel great, but they’re necessary to keep the lights on. These expenses can add up quickly yet remain unnoticed if you’re not monitoring your cash flow closely.
Solution: Analyze your monthly cash flow, business activities, and expenses on a regular basis. Make a list of all the operating expenses you incur each month, including how much they cost, how often you pay for these expenses, and who you pay. This type of analysis can help you determine areas you can cut back on. For example, you may not realize you’re overspending on telephone & internet services with your current provider. A cash flow statement or a balance sheet can help you keep track of these expenses. Cash flow analysis can help you prioritize where to spend your money in order to maximize efficiencies and minimize expenses.
Create a hard budget for your regular operating expenses, and stick to it. This will help you ensure that you’re not overspending to run your business. Consider applying for a business loan to gain the financing needed to cover your operating expenses.
2. Timing payments poorly
Problem: Your payments aren’t organized. You might rely on suppliers or lenders to stock up on inventory or access working capital. You’ll need to repay them in a timely manner to keep your business relationships strong and build your business credit. Late payments may be reported to credit bureaus by your suppliers, which can damage your credit health and make it difficult to secure financing. This is just one of many reasons why your business credit health is important.
Making payments on time is always important. But making these payments too close to one another can put a strain on your business bank account and your cash flow.
Solution: Organize your bills, invoices, and other payment due dates in one calendar. Prioritize your payments based on who you owe, how much you owe them, and the last possible date you can pay without incurring late penalties. Spacing out your payments can help you reduce the strain on your cash flow, allowing you to remain cash flow positive. If you’re still having trouble with repayments, see if you can negotiate discounts, extended repayment terms, or partial repayment options. Having the right supplier for your business will be able to help you negotiate repayment options. If you’ve built up strong business credit and can demonstrate this to suppliers, they may be willing to offer you more flexibility.
3. Poor inventory management
Problem: You’re spending money on idle inventory. If your business sells products to customers, you need to make sure you’re stocked up on the right inventory and supplies. You also should make sure you’re not wasting money on inventory that isn’t selling. If a large amount of your business funds is tied down to idle inventory, you’ll have difficulty scaling your business.
For example. you might run a bakery and spend $400 monthly on ingredients to make apple turnovers. If you only sell $100 worth of apple turnovers each month, you’re wasting $300 that you could use either for other business expenses or pocket as net income.
Solution: Rebalance your inventory purchases. Focus on items guaranteed to sell. Analyzing your monthly purchases can give you guidance on how much of your money is tied down to unused inventory. If you find yourself regularly sitting on extra inventory each month, consider revising your order cycles with suppliers so that you’re not over-purchasing each month. Reduce the amount of slow-turning merchandise you order each month. If you’re still struggling with idle inventory, offer special discounts to sell off slow-turning items.
4. Making impulse purchases
Problem: Impulse business purchases are decreasing your cash flow. When your business is doing well, your first gut reaction may be to invest in new product lines, renovation projects, expansions, or other projects that you feel will help you grow your business. As the saying goes, you need to spend money to make money. But making these types of purchases too quickly can cause financial strain.
Solution: Create a dedicated cash flow-based budget, and stick to it. Having a dedicated budget will help you avoid making impulse purchases that could potentially harm your cash flow. Allocate a certain amount of cash or a certain percentage of your cash flow each month to use towards these types of purchases. A solid budget will provide you with a solid infrastructure for making sound business purchases and expanding your business strategically. Sustainable growth will provide your business with long-term stability.
5. Over-investing in equipment
Problem: A large portion of your cash flow is used for equipment purchases. You might rely on certain equipment to run your business. Whether you run an auto shop or a beauty salon, this equipment is necessary for running your business effectively. When your business is doing well and growing, you may be tempted to purchase new high-end equipment for you and your employees. That said, you want to make sure you’re not making large equipment investments too quickly. Tying up a large portion of your business funds to equipment investments can leave you in a bind if you need to quickly cover unexpected expenses.
Solution: Identify business milestones you need to meet before making additional equipment investments. This could include business targets such as total revenue, average monthly revenue, and net cash flow. When making these additional investments, you may want to create a dedicated budget based on your monthly cash flow that’s solely for equipment purchases. Analyzing your monthly cash flow can provide you with insights on when to make equipment purchases. This information can help you stagger your equipment purchases so that your business has time to recover financially. If you’re still struggling with cash flow issues, you may also want to identify underused equipment that you can sell to gain a cash flow injection.
6. Not having a cash buffer
Problem: You don’t have enough cash flow set aside for rainy days or sudden expenses. Having rainy day funds set aside is important, especially for small business owners. You never know when seasonal fluctuations or accidents could harm your business. If an essential piece of equipment breaks and requires immediate repairs, you want to make sure you have enough money to tackle this problem and get your business up and running again.
Solution: Ideally, set aside funds to cover at least two months’ worth of operating expenses. If your cash flow is tight, small business financing products can provide you with the cash buffer you need. This buffer will help you cover sudden costs, such as unexpected repairs, legal fees, and other unanticipated expenses. There are different small business financing products available in the market, including:
- Small business loans
- Merchant cash advance
- Short term loans
- Business lines of credit
- Business credit cards
Having working capital available in advance can help prevent these stressful scenarios from spiraling out of control. Don’t wait until you are in a cash flow crunch to secure the funding you need.
Keep your business cash flow positive
Now you know 6 major cash flow problems that your business should avoid, along with 6 solutions you can execute to achieve business success. If you’re worried about keeping your cash flow positive, there are ways to inject your business with quick and effective cash. Thinking Capital can provide your business with well-timed financing. Applying for financing from Thinking Capital is a quick and painless process. You can simply apply online in under 10 minutes. Once you have completed the application, expect a verification call in as little as 30 minutes. If everything goes well, you can have your upfront capital deposited straight into your business bank account in as little as 24 hours.
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