We know that cash management is critical to small businesses, and is a very common cause of failure among both small and medium-sized enterprises.
For a business to be successful we need to discover and address the underlying causes of poor cash flow. So let’s start by identifying the biggest factors affecting a company’s cash flow.
It is critical for businesses to keep track of their earnings and expenditures. Keeping a record means you’ll never be surprised by a sudden lack of funds and you’ll be able to pick the best management strategy for your business.
Slow Collection of Accounts Receivable
There is nothing more frustrating than waiting for your vendors to pay outstanding invoices. One potential cause of these delays is that you and your vendors have conflicting goals. You want to be paid as quickly as possible while your customers want to extend the time of payment for as long as they can to free up working capital. You need to be able to rely on timely payment of your invoice so that you can invest in future business endeavors.
To learn more about the effects of delayed payments on your working capital, register for our upcoming webinar.
Your inventory is one of the biggest assets in your business. Efficient inventory management can boost your cash flow and help you fully optimize your resources, while poor management can cause cash flow constraints. A company with limited cash flow will severely damage its expenditures if it ties up significant capital in non-essential inventory. Most purchasing managers try to save money by buying a batch quantity; however, this inventory can sit for long periods and tie up the cash required for funding sales, R&D, and other operational expenses.
Growing quickly can actually have a negative affect on your company’s viability and cash flow. Without stable, steady, and reliable growth (or a sufficient risk management process), taking on more debt to fuel company growth can lead to a serious cash flow crisis. Often businesses will overestimate the growth they expect to see; be sure to consult your expense and profit data to find statistics that support your predictions.
There are many possible reasons for poor cash flow and usually more than one impact on your business. By identifying them, you can take steps to reduce the risk these factors can have on your business, increase control of your balance sheet, and achieve more sustainable growth.
Want to learn more about managing your cash flow? Click here to register for our webinar: “Why Companies Pay Late and How Not to Lose Sleep Over It”.