Running a startup comes with its set of challenges, and dealing with cash flow problems is part of these difficulties. Not every entrepreneur is a finance guru having experience in financial management. It can be pretty tough for new business owners to manage cash flows. Having a good cash flow is one of the essential aspects of building a successful business. Cash flow problems can also contribute to the failure of a small business.
Why should businesses avoid cash flow problems? It is essential to prevent cash flow problems and fix them when you start the business. Starting at the wrong edge can be extremely tough to recover from. You require an exceptional amount to pay your business’s bills and expenses, making it essential to keep an eye on your cash flow situation regularly. Being unable to pay your payments impacts your company’s credit rating, affecting your ability to get loans in the future.
Here we have outlined common cash flow problems all new business faces and ways to overcome them.
Not Getting Payment Straight-away
Is your business successful, but your customers delay payments too often? Well, this can put your business in a tough spot. Collecting receivables after deadlines can affect a business’s growth, preventing you from getting the money required to move your business ahead. Closing a deal with customers with the promise that they wouldn’t need to pay cash right away can create major cash-flow problems.
How can you overcome such cash flow problems? If you’re looking to claim your unpaid invoices and interest on late payment of commercial debts, opt for the help of a commercial debt collection agency. They will help you recover your invoices, providing a chance to make your cash flows stable. Protect your cash flows by asking for payments on time or at least a security deposit beforehand.
Inventory Regularly Ties up Cash Flow
Is your business experiencing cash flow problems, but you don’t know why? Well, it may be time to reanalyze your sale cycle and inventory. The ideal way to inventory management is to have a stock for the shortest time possible while ensuring that the most in-demand products remain in stock. This reduces the number of assets such as cash and inventory you have tied up in the business at any specific time.
What can you do to adjust your inventory to hold it for the shortest length of time? Have a clear understanding of all your future sale cycles. It helps you forecast inventory needs and fluctuations for making better purchase decisions. Moreover, consider using inventory management software if you spend more time on your inventory than other essential business tasks.
High Overhead Costs
One of the most common cash flow problems for all startups is experiencing high fixed and overhead costs. Many business owners expect high sales and feel it’s necessary to build an office to support their sales. However, keep your overhead costs as low as possible, giving you more cash on hand. Without primary data to maintain forecasts, your business might run out of liquidity very soon. Besides that, if your fixed costs are very high, your business might end up having severe cash flow problems.
What can you do to reduce your company’s overhead costs? Well, reevaluate the size and location of your office and think about whether it addresses your company’s most significant needs. Moreover, buying equipment and fixtures is a huge investment too. Hence, consider renting or taking it on lease. It allows you to utilize the equipment without stressing over its maintenance or repair. Furthermore, decide whether you need as many employees as you have hired for a startup since wages are another significant expense.
Spending too much on business meetings, software, fixtures, and advertising can easily lead to having no cash in the business, causing cash flow problems. Too much money going out and not enough coming into the business can leave the company with little or no cash in hand. Therefore, watch where and how much you are spending. What can you do to avoid overspending?
First of all, sit and decide which expenses are essential for your startup. For example, you might be spending on communication software, but your business might not need it. This is where performing a monthly corporate expense report plays an important role. It helps you track where all your money went and decide which expense needs to be cut off.
Moreover, instead of cutting costs like buying less inventory, think about what your business truly needs and cut down the remaining expenses. Reducing your costs provides the chance to save money, helping your business grow quicker.
Profit margin is an essential metric to know when making pricing decisions. It tells you how much money your business makes from what it earns. A low-profit margin suggests that either your costs are very high, your price is low, or it could be both. Without a sustainable and strong profit margin, your business might always enter into a cash flow crisis.
How can you improve your profit margin? A large chunk of a company’s costs come from daily operational expenses and producing goods. See where you can cut down your day-to-day expenses, reduce your costs, and improve your margin. Moreover, track your profit margin to get an insight into your pricing and cost details. It allows you to decide whether anything needs to change to improve your company’s cash flow.
Not Creating a Cash Flow Plan or Budget
A cash flow plan estimates the cash your business expects to receive and pay during a specific time. The primary purpose of using a cash flow budget is to forecast your company’s ability to receive more cash than that which goes out. Without having a cash flow forecast, you might not be able to keep track of cash inflows and outflows, creating problems. Preparing a cash flow budget helps project inflows and outflows, making it easier to make financial decisions.
It’s easy to feel overwhelmed by all your startup’s challenges, especially when facing a cash flow crisis. However, instead of quitting, take proactive steps to find the solution to every cash flow problem. Some simple tactics such as reducing your overhead costs, making a cash flow budget, and keeping your daily expenses in check can help you counter these difficulties.