Every business needs to remember that money isn’t money until you have it in your hand. New and smaller businesses are especially vulnerable to cash flow problems, as the monthly income may be unreliable and may sometimes be lower than your outgoings. You therefore need a strategy to manage and improve your cash flow to avoid your business becoming insolvent.
Tight margins
The profits you make from your products may be too low to cover the total cost of delivering your business. This is a common mistake with new startups that haven’t fully worked out their business model. When pricing a product, do your best to factor in all the costs of getting it to market, and consider dropping it if you can’t find large enough margins.
Clients who pay late or not at all
Clients will typically try to delay payment for as long as they can – the larger the client, the more they feel they can get away with this. This can put a great strain on your cash flow, especially if the larger clients account for the bulk of your revenue. With key clients like this, try negotiating early payments in exchange for a small discount.
More serious problems can occur if clients miss deadlines or fail to pay at all. The best solution here is to prevent it happening, by checking the payment records and creditworthiness of new clients in advance. In addition, develop strong credit control practices to help you chase and recover bad debts.
Too much stock
If your business is based on you buying in stock or raw materials to sell on, it doesn’t make sense to keep more stockpile than the business can handle within a set timeframe. Unless you payday loans Erwin for bad credit are anticipating a sudden massive order, try to keep only as much stock as you are likely to need before the next delivery window. This is the principle behind ‘just in time’ (JIT) manufacturing, to avoid tying up lots of cash in stock that merely sits around waiting.
If you need to buy in stock that exceeds your cash flow, trade finance (a form of short-term business credit) can be an option. Continue reading →