Maintaining healthy cash flow is one of the most critical challenges for small businesses. Poor cash flow practices can quickly bury a business, with owners finding they don’t have enough cash on hand to continue business operations.
Poor forecasting
Cash flow forecasting is essential for business success. A robust forecast will use historical data and market trends to determine the cash flow requirements of a business throughout the year.
Crucial business decisions are made downstream of a cash flow forecast, and these decisions will have an immense impact on the success or failure of a business.
Delayed invoicing
For businesses that rely on invoicing for revenue, it’s vital that invoices be sent and paid in a timely manner. Delays in accounts receivable can quickly build up and lead to cash flow interruptions that hinder business growth and operation.
Ensure that your business has clear standards and processes for invoicing to minimise delays. You can also utilise advanced accounting software such as Xero or MYOB to automate and streamline the invoicing process.
Debtors
Late payments and debts can have serious repercussions if not handled effectively. Without timely funds, it can be difficult to maintain business operations, and you may have to burden your cash flow further by allocating resources to chasing debtors.
Ensure that your business has process in place to effectively manage debtors, utilise online payment services for ease of access and closely monitor payment records to identify debtors early.
Inventory overstock
Purchasing excess stock or supplies can be detrimental to cash flow, particularly stock with an impending expiration date. If you have vital revenue tied up in stock that doesn’t sell, it’s will negatively impact revenue and strain cash flow.
Rapid growth
Periods of growth are exciting, especially early on in a business’ lifespan. However, it can be easy to get swept up by emotion and overestimate the short-term success and expansion of a business.
As a business grows, so do the necessary expenses. Quick adjustments will need to be made to address increased costs and you’ll need to ensure that business revenue is able to match.
No safety net
Businesses rarely maintain stability year-round, and it’s likely that there will be periods of volatility. Though they can be difficult to predict, and there are many external factors at play, these volatile periods must be accounted for to minimise disruption. If you fail to address and plan for these periods, they can be destructive for your business.
Ensure that you have forecasted periods of volatility where there is data available, implement strategies and allocate resources in the event of circumstances beyond your control.
