Business Development

4 potential cash flow issues in new businesses and how to avoid them

The survival of a new business lies in being able to maintain a stable cash flow.  Cash flow can be defined as the money that goes in and out of any business and can be calculated monthly, quarterly or yearly.

A steady supply of cash coming in allows you to keep a steady supply of cash going out to pay your creditors, buy inventory and make the right investments at the right times to ensure your business can grow and keep pace with competitors and your clients’ expectations. An inadequate cash flow has been the downfall of many a business.

The hardest thing to put in place for many new and emerging businesses is start up finance. Having your start up finance in place allows you to plan and manage all the areas of your business to ensure your cash keeps flowing. Without it, you risk coming to a grinding halt sooner or later.

In this article we’ll discuss four potential cash flow issues and offer solutions to them and more importantly, ways to avoid then becoming a problem in the first place.

  1. Disorganised Books

Too often in new businesses, owners don’t take their bookkeeping responsibilities seriously enough because they would rather focus on the other aspects of running their business. And that’s understandable. The only people who got into business to spend their days poring over numbers are accountants.

But failing to take the time to record and analyze your figures carefully results in disorganised books and a lack of up to date knowledge on what is going on inside your business, which can be very dangerous to your chances of being successful.

Let’s take an example. A professional landscape gardener who has a good business model and charges a reasonable price to his clients. He does a good job and is busy. Nonetheless, his bills start adding up to the point where he is falling behind on payments and getting red letters. The business owner is confused as to how he could be faced with all these backlogs of payments, regardless of charging a reasonable price and working hard. After scrutinizing his payment collecting method and invoicing system with the help of a bookkeeper, he discovers that his invoice numbering was inconsistent and so he lacked information on who has paid him and who has not.

After reconciling the invoices he overlooked, he realizes that vast numbers of payments are missing. This problem can be easily remedied and prevented with a robust and effective bookkeeping and invoicing system. This way, problems – if there are any – can be spotted fast and addressed quickly.

Organizing your books and getting proper systems in place is therefore extremely important in keeping your business prospering.

  1. Bad Debts

Bad debts can be explained as any money your clients owe you and there are no hopes of recovering. New businesses can’t survive clients who are not willing to pay so it’s important to put in place procedures which can help limit the occurrence of bad debts.

Bad debts can happen when your business lacks effective money control techniques. A system of appropriately controlling money is needed to oversee how money owed to you by clients is going to be collected. When starting a business, it is vital to set up this mechanism from day one.

It can be easy to develop a credit collection or control technique when your business has proper books. You can do this by creating alerts in your system that flag up when someone is close to their payment date but hasn’t paid yet and allows you time to write reminder letters or emails, or if you still don’t get the desired response, involve debt recovery companies.

To protect your business from clients who cannot or do not pay want to pay their debts, it is essential to run credit checks to be on the safe side before you give your clients goods on credit. If a credit check shows a customer has a poor credit history, you can always ask them to pay upfront or pay half of the full amount upfront, so that you are at least partially covered if they were to default.

  1. Growing Too Quickly

Who doesn’t start out in business dreaming of growth that sky rockets? However, there is such as thing as growing too fast.  How you grow matters a lot to your business’s chances of success.  When you try to grow too fast, this can create cash flow problems for your new business. Growth can occur where you start getting a lot of demand, but don’t have the inventory or the systems in place to handle it, and you don’t have the cash flow to get those things in place until the work is completed and paid for, so it’s a vicious circle. Nonetheless, you can solve this by seeking funding to fill the stop gap while you are able to fulfill the orders on your books. A loan or business cash advance from your bank is more likely to be granted when the lender can see your purpose is to allow your business to grow, but check all your options before jumping into a decision, as interest rates and terms will vary according to the lender and some deals are far better for small businesses than others.

  1. Profit Problems

It sounds obvious, but the bottom line is that businesses that aren’t turning a profit, will suffer from cash flow problems. Whatever the problems are that are causing your business so stagnate rather than grow, they need addressing as quickly as possible before your profit problem becomes terminal. Any problems that do exist however, will be spotted far more quickly if rigorous systems are in place to monitor your cash flow. And early diagnosis allows you a better chance of curing them.

Conclusion

It’s important to understand the difference between cash flow and profit. The profit margin of your business might be significant with robust growth, however, having your cash held up in any part of your business will not make it easy for you to make payments to your suppliers. Apart from anything else, this delay in paying suppliers can significantly damage your business’ reputation.

Hoping and wishing your business’s cash flow problem away will of itself solve the problem. Taking preventative action to keep problems at bay, and remedial action as soon as a problem is identified is the always the best course of action.