5 Signs Your Business Could Be Headed Towards A Cash Flow Disaster
Ever heard the adage, “Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most”? It’s true. Cash flow allows businesses to continue running. But it’s not uncommon for businesses to hit bumps in the road and become short on cash flow. Business can slowdown at certain times of the year. A need to reevaluate expenses and pricing can also cause a cash flow problem. And let’s not forget how a natural disaster or pandemic can cause businesses to experience a slowdown. However, it’s important to consider being aware of the warning signs that a cash flow slowdown is on the horizon. Here are some signs that your business needs to consider:
Late Paying Customers
If your customers are not paying on time, how can you run your business effectively? The purpose of customers paying by a specific date is so that you can pay your expenses. The best way to avoid late paying customers is to set clear expectations when you begin building a business relationship. Begin by sharing a contract that outlines your terms and conditions for completing a project. Then, before a bill is due, remind your customers–at least one week in advance. If customers consistently pay late, it does not hurt to discuss their lateness and how it impacts your business. And, if the lateness continues, do not be afraid to fire your customer.
Read This: 6 Ways to Improve Cash Flow
You Are Running Out of Working Capital
If your business does not have enough capital, that’s a sure sign that your cash flow is in trouble. Without working capital, how will you fulfill orders or pay expenses? Pay employees? Fulfill orders? While business financing might help you momentarily, you will have to make sure it is a worthwhile risk. Afterall, if you borrow money, you will need to repay it, which might lead to even bigger cash flow issues.
Taking On Too Much Short Term Debt
While we are on the subject of business funding, it’s important to consider how short term loans can negatively impact a business’ cash flow. While additional funds might be convenient, short term business loans typically carry a high interest rate and present another bill to entrepreneurs. Not to mention, with daily and weekly payments due or even lenders having access to your incoming credit card sales, you might find yourself struggling to stay afloat.
Many vendors will grant business owners with a discount if they pay before the invoice is due. For business owners, this is a cost-saving method. And for vendors, it ensures their cash flow is positive. However, if a business cannot take advantage of a discount, they are not saving any money. And, they also have to make sure that they’ve recorded the expense properly–at the full amount, not the discounted amount. Failure to record expenses properly will lead to a cash flow problem because your business will not have as much capital available.
Read This: 3 Steps to Managing Your Business’ Cash Flow
Your Business Is Growing
Surprisingly enough, an expanding business can often lead to a cash-flow slowdown. Here’s why: a growing business means more expenses–more people to hire and more inventory. If a business is not ready for a quick expansion, it could lead to a cashflow deficit. If you are expecting your business to grow quickly, you have to be prepared. One of the best ways to prepare is to strategically plan your growth. A business line of credit or loan, for instance, will help a business easily handle growth by providing additional funds that will support the need for additional costs.
While having setbacks is a part of a business’ life cycle, it is important to consider how you are operating your business on a daily and monthly basis. Doing so will help you to remain aware of the signs that could ultimately lead to short cash flow or worse, end of your business.