Most businesses have problems that have by unexpected means clogged the spinning wheels of their financial condition. While some can have causes to understand or figure out what the source of the problem is, many small businesses do not and thus could still be struggling with standing up just because they couldn’t make out the reasons for their problems nor could they identify precisely what the problems are. This is why this article will be concentrating on the 7 cash flow problems small businesses Faced.
Cash flow problems happen when a business does not have enough liquid cash to cover its liabilities. Cash flow only becomes a problem when outflows exceed inflows. At that point, the business uses up its cash reserve and can no longer meet its liabilities.
Different businesses will agree to the fact that you may have business success selling, but if your customers are slow to pay you, that can put you in a tough spot. Collecting receivables too slowly can stifle growth and not give you the money you need to continue to move your business forward. Plus, cash flow problems from slow receivables collection can make it difficult to pay your bills on time. Putting a receivables process in place, and only extending credit to customers who have a history of making prompt and on-time payments can help position you well to avoid cash flow problems from receivables.
7 Cash Flow Problems Small Businesses Faced
For the many companies, be it small or big, that are facing one or two problems to date and are finding it hard to rise up form their crumbling financial postures, this article has garnered the energy to put it to you that there are some 7 cash flow problems small businesses faced which you need to pay attention to if you must be over your situation once again at least.
1. Low Profit Margins
A low profit margin indicates that either your costs are too high, your price is too low or both. Without a strong and sustainable profit margin, you’re always going to battle cash flow issues. Pricing can be an art, but it still starts with knowing your numbers. Your profit margin is an important metric to know when analyzing prices. Your profit margin will tell you how much money your company makes from the money it earns. Reviewing your profit margin and tracking it over time can give you insight into your pricing and cost details so you can see whether something needs to change to help improve your business.
2. Underestimating Startup Costs
If you’re just starting a business, getting a realistic budget in place is necessary to help you avoid cash flow problems right from the start. Unrealistic estimates and lack of a cash reserve will get you started on the wrong foot. Think of how challenging it would be to run out of money before you even have a chance to open your doors. If you’re not sure where to start with estimating startup costs, the small business has a worksheet that can help guide you through creating a startup budget.
3. Expecting Profitability Too Quickly
When you open the doors to your business, you probably hope that customers will be lining up waiting to purchase from you. But that may not be the case for your business. A Kabbage survey found that 84% of small business owners reach profitability within the first four years of their business. And 68% reached profitability within the first year. It can take time to build a profitable business and nearly one-third of businesses won’t hit that milestone in the first year. If you’re not prepared for this, that can create cash flow issues early on in your business. Setting a realistic time frame to profitability and having enough cash to hold you over until then can help you avoid worrying about your cash flow.
4. Over-piling Invoices
Businesses can’t expect to have any cash if their clients aren’t paying their bills. But, that’s the reality that many businesses face. A recent study revealed that 33% of businesses have invoices totaling at least 20% of their receivables that are more than 90 days overdue. When not enough money comes in, cash flow problems could be right around the corner.
5. Slowed Down Sales and Increasing Expenses
Maybe, it’s a seasonal thing. Maybe, it’s related to the economy. Maybe, customers have simply moved on. Whatever the case may be, when sales slow, the cash river dries up. Prices then begin to go up. Such is life. When businesses are hit by a lot of increased expenses at once – say when rent, Internet and the cost of supplies all go up – cash flow problems may very well materialize.
6. Not Creating a Cash Flow Budget
A cash flow budget is an estimate of cash you expect to receive and cash flow you expect to pay during a period of time. This can also be called a cash flow forecast. If you want to create a cash flow budget for the next 30 days, project how much cash you expect to receive and spend in the next 30 days.
This budget can be more useful than a standard budget in the day-to-day running of your business because it will help you get a handle of your cash position at any point in time.
Will you have enough to pay your bills? When do you expect the bulk of your outstanding receivables to come in? A cash flow budget can help you answer those questions and tackle issues before they become big problems.
7. Overlooking High Overhead Costs
If your overhead costs are too high, your small business is going to experience cash flow problems. Costs like high rental costs, expensive car leases and travel can eat into your profits quickly. When you have high overhead costs you’re fighting an uphill battle. You have to sell more just to cover your overhead costs and break even. Reducing overhead costs can make a long-term difference to the profitability of your business and its cash flow.
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