To ensure the growth and success of your small business, it's not enough to provide exceptional products or services and outstanding customer service. While these elements are important, the factor that often determines long-term viability is effective cash flow management. Cash flow problems can affect businesses, sometimes without the owners even realizing it.
To illustrate the significance of effective cash flow management, consider that cash flow issues are the leading cause of business failures, responsible for 80% of such failures.1 In this Huddle Business Capital blog article, we outline six strategies to help prevent cash flow problems.
The amount of money you spend on business expenses must align with your budget constraints. If expenses exceed your budget, it will negatively impact your cash flow. You can track your business spending using expense reporting software. Regularly monitor all expenditures, categorizing them into relevant areas such as supplies, utilities, marketing, and payroll.
This practice not only helps you stay within your budget but also allows you to analyze spending patterns, identify potential savings, and make adjustments to your spending, if needed.
Inefficient inventory management practices can disrupt your business's cash flow. For example, if you order too much inventory, you may face excessive stock that ties up valuable capital, leading to cash shortages for other essential operations. Conversely, understocking can lead to additional costs to fulfill backorders, as well as lost sales and dissatisfied customers, which further complicates cash flow issues.
To help prevent cash flow issues relating to inventory, utilize inventory tracking software. Such software provides real-time stock levels and ensures that you maintain optimal inventory without overstocking or running out of high-selling items. Additionally, effectively managing your inventory can optimize your inventory space and reduce storage costs.
An unexpected economic downturn or a prolonged period of sluggish sales can erode your company's cash flow, making it challenging to meet operational expenses. Situations like these can lead to tighter margins and force you to revise your budget, cut expenses, and make difficult staffing decisions.
One way to navigate challenging times is to set aside a portion of your business income on a weekly or monthly basis. By establishing a dedicated savings routine—and sticking to it—you can create a financial cushion that provides peace of mind during unforeseen circumstances.
It is essential to protect and enhance your business credit profile to ensure your company's financial health and credibility. If your credit score drops, you may find it difficult to secure business financing, such as a working capital loan or equipment financing. And if you are approved for financing with a poor credit score, you will most likely have higher borrowing costs (e.g., a higher interest rate).
So, make a point to pay your business's bills and loans on time, keep your credit utilization low, and regularly request business credit reports and check them for accuracy. By achieving and maintaining a good business credit score, you increase your chances of getting approved for a loan or financing when your cash flow is tight.
When reviewing your application for business funding, lenders will not only examine your business credit profile but also look at your personal credit history. This allows them to gain insights into your financial responsibility and borrowing habits, ultimately influencing their decision-making process regarding the approval of your funding request. That's why it is crucial to build and maintain a good personal credit score.
The strategies to help achieve this goal are similar to those relating to business credit. Make timely payments on all your bills, aim to keep your credit utilization low, and avoid applying for multiple credit accounts in a short period.
Here's a question for you: Do you have a complete understanding of your company's costs for the products or services you sell and how much profit you are generating? If the answer is no, your margins could lead to cash flow challenges down the line. For instance, you may have products or services that are operating at a loss.
Start by reviewing your sales results, the pricing structure for your products or services, and the costs associated with each (e.g., materials, storage, labor). If you find any products or services that are not generating profit, or are only producing minimal profit, consider raising their prices. Even if you have good sales numbers, losing money can negatively impact your cash flow.
1 - https://www.score.org/resource/blog-post/1-reason-small-businesses-fail-and-how-avoid-it
This Huddle Business Capital blog article is purely educational and contains general information and opinions; it is not intended to provide advice or recommendations of any kind. Huddle Business Capital is not affiliated with nor endorses the companies mentioned in this blog article.