No doubt the term “poor cash flow” is one that you’ve heard often – it’s what keeps most business owners up at night. Essentially, a poor cash flow situation means you are consistently spending more money than you have coming in. Poor cash flow is a big issue and the reason why 82% of small businesses fail.
Now, if that happens once or twice because of unforeseen circumstances you can adjust and work around it. But if it’s occurring regularly, for the sake of your business it must be addressed.
The good news is there are actually tons of ways to avoid negative cash flow. We’ve compiled some common causes of poor cash flow and how you can fix them.
Signs You’re Spending Too Much
The first step to creating a healthier cash flow is to work out where you’re going wrong. Think about whether your business is guilty of any of the following:
- Poor Financial Planning
Poor financial planning could lead you to find yourself in serious financial difficulty. If you fail to perform a good cash flow forecast and don’t set your budget beforehand, you’re extremely likely to suffer from cash shortages.
If you’re following a negative cash flow business model there’s bound to be trouble ahead for your business. Finding yourself in a negative cash flow is hard to come out of and no matter what you do, you’re always going to be behind.
It can be tempting to buy things we don’t need. However, spending money on non-critical business investments will only drain your funds. This is a big problem, meaning you won’t have sufficient cash to pay for the items that you actually need.
- Expanding Too Fast
Expanding your business too soon, without a secure plan or sufficient capital can put your business in negative cash flow. If things are going well, you may be tempted to significantly increase your orders even if you don’t have enough resources in place to fulfil them. But this can have a negative impact on your cashflow.
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- Low Profits
If your profits are low, you may simply not have enough incoming cash to keep your business running.
If your business is unprofitable, you won’t have enough money to cover all of your outgoings. This might lead you to borrow more cash than you can repay or worse, close down your business.
Reasons why you might not be generating high profits:
- Your sales and marketing operations aren’t sufficient.
- You’ve got low staff productivity.
- You’re charging too low for your products.
- Your ordering and delivery processes need improving.
- You’ve got high and uncontrolled spending.
- High Overhead Expenses
Overheads are the ongoing expenses of your business that aren’t directly related to the production and selling of your products. Some common examples include: rent, internet advert other utility bills.
While these costs are important in maintaining the running of your business, they can hurt your cash flow. Once your overhead expenses grow too high, it can become difficult for you to pay them on time and you might see yourself running out of money.
- Not Accounting for Unexpected Expenses
Spending money on unexpected expenses or changes can put a strain on your cash flow. Usually, these changes are things that you didn’t foresee and did not include in your cash flow forecast.
Some common unexpected expenses include:
- Loss of staff
- Equipment breakdown
- Increase in market competition requiring you to invest in new technology or equipment.
- Excessive Withdrawals or Borrowing
This occurs when you withdraw too much money out of your business or borrow money from banks but don’t have enough profit to repay it. Borrowing large amounts of money may prevent you running out of funds in the short term, however it only delays a potential further financial crisis.
If you find yourself in a negative cash flow situation the first place you should look into is your inventory. Excessive overstocking can impact your businesses finances. When you stock too much of your raw ingredient or products, it can tie up significant amounts of money and occupy costly warehouse space.
Also, products that stay on your shelves for too long run the risk of becoming outdated and unsellable, making you less profitable.
How Can I Make Sure I Don’t Spend Too Much?
- Make A Budget and Stick to It
Stick to your budget. If your cashflow is tight, don’t make decisions that will force you to take out loans or withdraw cash out of your business. Reserve as much cash as possible so you’ll have something to use when emergencies arise.
- Anticipate Problems Before They Happen
Identify potential cash flow problems in advance. You can do this by:
- Regularly updating your cash flow forecast.
- Monitoring market conditions.
- Keeping an eye on customers and suppliers who may be in trouble.
- Taking action as soon as you see a problem.
If you’re worried about potential problems, it’s a good idea to talk to an accountant.
- Manage Inventory and Predict Orders
Having good management of your inventory is key. Keep track of your stock and review it regularly to make sure it’s used within its use-by date.
To help with inventory forecasting, try and identify the products that do and don’t sell so you can avoid being out of stock or overstocked on certain items.
Predicting your orders is important. Estimate how many retail orders you’ll receive in a week or month so you can stock the right amount and ensure you won’t overproduce goods.
- Set Up Your Key Financial Statements
Keep a consistent overview of your business’s finances by setting up the following:
- Balance sheet
- Profit and loss statement
- Cash flow statement
- Cash flow forecast.
Don’t be put off by this. There are many templates and samples online that you can use as a reference. However, if you want your plans and forecasts to be as accurate as possible, get yourself a professional accountant.
- Cut Back on Non-Essential Outgoings
The idea is to eliminate everything that isn’t necessary for your business, so you can have more cash reserves in case of emergencies. Regardless of how big or small that cut is, it will still give you some more room in your budget to accommodate unexpected expenses.
- Switch To Cheaper Alternatives
If your overhead costs are too high, try switching to cheaper options. This could be a smaller space with lower rent or shifting to a different service provider.
Also, you could try switching to using materials with a higher profit margin.
Read Now: How To Save Money With Your Own Business
- Freshen Up Marketing Efforts to Help with Low Profits
If your profits are low, it might be time to freshen up your marketing efforts; revamp your website, your product catalogue, or social media campaigns.
If you need assistance managing your income, get in touch with our Count team today to find out more!