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Four key cashflow issues that could cripple your business (and how to avoid them)...
At the risk of repeating ourselves, cashflow is king for every small business.
You can have the best business idea in the world, but without sufficient incomings to meet your expenditure, you’ll never have the money available to make your business grow.
You can see here how to create a simple 12-week cashflow forecast. The forecast will help you keep a closer eye on the money flowing in and out of your business, and prepare for any known costs coming up in the near future.
But of course, not everything in business can be predicted.
So, as well as preparing your forecast, you also need to be aware of the key issues you could run into that might cause your cashflow to dry up.
In this blog, we’ll identify four of the most common cashflow issues encountered by SMEs, to help you expect the unexpected…
1) A slump in sales
Let’s start with the obvious one - a sudden and unforeseen drop in sales. While you might be able to plan ahead for seasonal dips, sometimes a slump in sales just takes you by surprise.
Guarding against this eventuality calls a number of factors into play - such as ensuring your marketing remains active even through profitable periods, and never taking repeat custom for granted.
It’s also vital that you have a financial fall-back plan in place. How and where will you get the temporary injection of cash you may need to see you through the slump?
There’s no shortage of short-term funding options available to small businesses, but it pays to consider your choices in advance - rather than being panicked into a decision when your sales shortage takes hold.
2) Too much stock, not enough liquidity
The issue of carrying too much stock goes hand in hand with a slump in sales - but even when sales are strong, you can still have too much money tied up in product.
Maintaining adequate stock is important in being able to meet demand (and bulk buying may even help you get a better purchase price), but there’s a balance to be struck between cash in the bank and product on your shelves.
Indeed, if you over-invest in stock and have no liquidity, how will you deal with an unexpected bill or other unforeseen expense? Sometimes, it might be better to put up the ‘sold out’ signs rather than sink everything you’ve got into stock.
3) Late payments
Waiting to be paid is one of the most common reasons small businesses run into cashflow trouble, with some businesses frequently waiting up to three months for payment to come in from clients and customers.
Even if your clients are historically quick payers, don’t assume that will always be the case. After all, yours isn’t the only business vulnerable to cashflow problems, and if your customers hit their own rough patch, you could be kept waiting for your money.
To protect yourself against the effects of slow payments, you may want to consider shortening your invoice payment terms. Research by Xero shows that while invoices with shorter two-week payment terms are most likely to run past the due date, they still typically get paid faster than traditional 30-day bills.
If you’re worried that two-week terms aren’t fair on your customers, the same Xero survey suggests that 75% of businesses are already using short payment terms - so it’s unlikely to come as too much of a shock.
Of course, if you’re already waiting on overdue invoices, shorter payment terms won’t help you - but invoice finance options might.
Invoice finance effectively sees you sell unpaid invoices to a third party, who advance you some of the money in return for a cut of the payment when it finally arrives.
4) Internal and external changes
Sometimes, a cashflow shortage will come about due to factors beyond your control. A sharp economic downturn perhaps, or a legal change that requires significant investment in order to ensure compliance.
Bad luck can strike within your business too - such as the unexpected loss of key staff due to illness, or the sudden breakdown of a critical piece of machinery.
These internal and external changes can’t be foreseen, but they can be managed to some degree.
Key man insurance policies, for instance, would protect your business against the loss of vital team members, while fundamental business equipment should also be insured against damage.
Meanwhile, a contingency finance plan outlining your short-term financing options will provide some reassurance in the event of external pressures.
If you’d like to know more about cashflow forecasting, or discuss financing options with our experts, just give us a call on 0121 667 3882 or email email@example.com
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