Cash is the basic requirement of any business whether large or small. You cannot deal with your clients and customers without the involvement of cash. If you possess a business that requires you paying your workers in cash often, it is important that you have the money available at all times.
What is cash flow?
Cash flow is the money that is given and received very often in any business. You can measure it over a certain period of time such as monthly or yearly or weekly. It is essential for any business to have well-maintained cash flow because it keeps the business intact. Poor cash flow has been the reason why 25 percent of businesses don’t last more than a year. If you don’t keep your cash flow in check you will be stuck in a crisis you might very hard to come out of.
In this article, we will spend time discussing the basic problems a business undergoes when dealing with cash flow and how to avoid them.
1. Not maintained financial books
The first and the most common problems entrepreneurs face is having unorganized books. Setting up a business is so demanding and time-consuming, business owners usually don’t have the time to maintain these financial books. More priority is given to the rest of the processes. The problem with this is you don’t have records of all the money that was spent on supplies and other essential during the job. Therefore you cannot keep track of the money you have left. If you don’t have a list of all your money spent you can’t know when you are running out of it. In this case, you won’t even know when your business went broke.
To avoid this you need to work on keeping those books up to date.
A company can be crippled to its lowest if the company doesn’t have a good credit control system. This system is built to ensure that you get the money that you owe your clients on time. Because if you don’t, you will be stuck for money in your future projects.
You can avoid bad debts by performing credit checks on your customers before lending them money.
To be able to do this, you need to follow the first advice, and keep a good record of your spending around the business. Along with that, whenever you lend to a client make sure they have a good credit history. If they don’t and yet you want to make them your customer, try issuing partial invoices or you can ask for a deposit upfront.
3. Non-Compatible Credit terms
You can go into a negative cash flow and run out of money if your credit terms with your customers are out of sync with the credit terms set by your suppliers. The best way to do this is to renegotiate your terms with either the clients or the customers. It would be a loss for you if you didn’t receive payment around the time, you are supposed to pay your suppliers. To lure your customers to pay you early you can try factoring or maybe even certain early settlement discounts.
4. Profit issues
It is quite obvious that if your company does not make a profit, the company is bound to have cash problems. Even though you might survive your first loss, the company will eventually come to a broke if you keep sustaining losses. If you reach that condition, you are bound to it and you cannot get out of it. So keep making profits.
5. No cash flow forecasting
Cash flow forecasting is the process through which you predict the future credit and debt. This is very essential for every business new and old. This prediction will tell you how to further spend or save your money. So you will know when in the future you will have a deficiency of money and when you will be in a surplus. All this data can be collected through the previous months that have passed. After you have a forecast and spent accordingly, you can compare it to the actual financial dealings of that month and keep changing the data accordingly.
6. Success too quickly
If a business grows a lot in a small period of time in its initial years, you can be in trouble. A well-grown business means that you are getting a lot of orders and for a small business producing its products for a lot of clients at one time could make the company run out of money. Because production and provision of software services at an increased rate will lead to spending more money on workers and material than your usual. Therefore you could end up losing money on this.