According to a recent U.S. Bank study, a whopping 82% of small businesses fail due to poor cash flow management. Usually, the lack of understanding of how cash flow works sees small businesses lose more money than they can bring in. Instead of using their liquid assets to expand and grow their business, smaller companies are fall into needless debts and eventually get shut down due to these cash flow problems. Understanding how cash flow problems occur in the first place and how best to avoid them is the first step towards a successful business venture.
So, what is cash flow?
Simply put, cash flow is the net amount of cash circulating in a company over a certain period. As a result, there can be both a positive and a negative cash flow, all depending on the amount of cash incoming and the amount of cash outgoing. Logically, if there’s more cash incoming, then there’s a positive cash flow and if there’s more cash outgoing, then there’s a negative cash flow. Moreover, by increasing your positive cash flow, your company has an increase in liquid assets which is vital for the expansion and overall growth of any business. Apart from helping you invest in your business’s growth, positive cash flow provides more flexibility in situations where there’s an opportunity in immediate investments. Having cash on hand provides quicker decision-making in such cases, as well as better coverage of debts by paying them off as soon as possible. Usually, cash flow is an excellent indicator of a company’s strength and financial health. Therefore, it is important for companies to find new ways to lower their major expenses in order to see a decrease in negative cash flow.
What are the most common cash flow hiccups?
A lot of new businesses lack the necessary organization to stay on top of their bookkeeping, which in turn sees them losing more money than they should. Another problem is that small companies try to expand too fast without even predicting their future positive cash flow first. Consequently, they end up biting off more than they can chew and getting into a lot of debt that they can’t settle any time soon. However, the major hiccup that will cause an increase in negative cash flow is not getting paid by customers. Although it sounds somewhat silly, only a small percentage of businesses charge for their services immediately, which means it sometimes takes months or even half a year for customers to pay off their debt. In addition, fraudulent transactions plague small businesses, which more often than not causes them to get the short end of the stick.
How to increase your cash flow?
There are a bunch of clever tactics out there that you should be using to increase your business’s positive cash flow. First of all, billing only after you’ve completed your services will see you lose money, as explained above, so try adopting a ‘half-now, half-later’ mentality and keep that cash flowing from the very beginning of a project to its completion. Also, allowing pre-purchases of your products and services is another great way of pumping up your cash flow from the earliest stages. Next, don’t go too heavy on the discounts: while they are a great tool for attracting customers, small businesses can sometimes be rather short-sighted and go overboard with them. As a result, such transactions will end up costing you money instead of making it, or best case scenario, they’ll see you barely breaking even. If you want to make good use of your discounts, then take advantage of them by setting them up for customers who pay for your services immediately or in the first few days. This way you’ll encourage them to pay for your goods and services as soon as possible, which will decrease the time it takes for the cash to finally reach you. Furthermore, targeting old customers is yet another smart tactic as people who paid for your services in the past are more likely to do so in the future. This is why customer loyalty campaigns are essential, as explained in what is known as the Pareto principle, where only 20% of your customers will make 80% of your overall transactions. Finally, offer your products and services in bundles, or team up with another business and think of ways to mutually benefit from this cooperation.
To sum up, maintaining a steady stream of cash is imperative for keeping your small business alive and kicking. Spreading it too thinly or being ‘too generous’ with your customers will make you penniless, with nothing left to reinvest into your own business. So, use this newfound knowledge to cut your losses and make sure the cash keeps on flowing.