Over 82% of businesses fail due to cash flow problems. With this large percentage, one would think that any business owner would be careful to not run into cash flow difficulties. However, cash flow problems are not uncommon for businesses, especially those which are still in its early stages. Cash flow problems can stem from disorganized accounting books, debt build-up, and increased expenses due to growing too quickly.
How Cash Flow Troubles Can Lead to Crisis
Cash flow is simply defined as the status of money flowing in and out of a business. A positive cash flow where more money is coming in than going out is ideal, however, several factors such as seasonal expenses and late payments can result to a negative cash flow. Businesses may experience negative cash flow from time to time. Proper strategic management and sound cash flow analysis to ensure that your business will stay afloat despite the lack of cash.
Here are 7 financial management points to steer away from a full-blown crisis:
1. Know the signs
Running out of cash, lacking accurate accounting reports, and failing to pay bills on time are some of the warning signs of an emerging crisis. However, these indicators of financial catastrophe normally manifest during the advanced stages of a crisis. Before the problem even hits your finances, pay attention to subtle signs that your business could be in trouble. Early warning signs include generating majority of your income from only one or a few key clients, no engagement from new customers, or an increased employee turnover rate. Once you recognize these signs, you can take the right steps to mitigate and prevent further damage.
2. Keep your financial statements updated
Staying on top of your finances means knowing the state of your business at any point in time. Is your business turning a profit or losing money? Up-to-date bookkeeping and accurate accounting reports are the clearest indicators of a company’s financial standing. As stated in the first tip, one sign of a looming financial distress is outdated accounting reports. If your accounting department cannot keep your numbers on track, consider the services of an accounting firm before your financial status gets out of hand.
3. Plan your cashflow
Once you have updated reports on hand, create your cashflow forecast. List out your monthly projected income and the forecasted expenses for the next 6 months to a year. Plan for those months when expenses will be higher than normal, for example, during bonus season, holidays, or the month before a product launch. From your calculations, you will be able to determine how much money the company should be setting aside for anticipated expenses.
4. Collect payments on time
Watch your collections closely. Maintaining good customer relationships can mean giving grace periods for payments especially regarding big orders. However, in case your forecast shows that you will be running out of cash for the next couple of months, your option is to leverage these good client relations to request an on-time or advance payment. Consider offering a discount in exchange for the early payment.
5. Cut expenses
Look for ways to reduce costs. Analysts suggest looking into key areas such as manufacturing, packaging, and marketing campaigns. Consider cost-efficient production options and evaluate the benefits of digital marketing options versus traditional strategies. Next, scrutinize your company’s overhead expenses. Are there business support functions that can be simplified? For example, compare the cost of maintaining an in-house accounting system to using a cloud accounting service. Other factors such as availability and security must be considered too but keeping an eye on other options allow you to be prepared in case you need to find alternatives.
Latest posts by Dustin Pfluger, CPA
- 5 Financial Management Tips to Avoid A Crisis - November 14, 2017