Cash Flow Pitfalls
Wednesday, February 10, 2016
by Kelly Weaver, Small Business Development Center Regional Director
Perhaps you have heard the phrase “Cash is King”. You may have also heard that a major reason for business failures is not having enough capital. The type of capital often missing is ‘working capital’, that is, cash available to pay for day-to-day operations. Even profitable, successful businesses can suffer from cash flow problems. So what are the major causes of this small business challenge?
For new businesses with no history, it is easy to get in trouble if you have overestimated revenue or spent more than available on expenses or both. Forecasting is a tool that can help businesses set a budget for expenses and look at various revenue scenarios. Understanding what is needed to cover your expenses will help you be on alert when revenues are not meeting expectations or expenses are elevated so that changes can be made before the cash situation is critical.
Additionally, most businesses do not enjoy the process of collecting money from customers. First of all they may not take the time to put policies in place for offering credit to customers and they may not be consistent in billing for their products or services. And when customers don’t pay, business owners may not put a high enough priority on making the call to collect. You can bet other businesses are calling and they are first in line to get paid. As they say, the squeaky wheel gets the grease.
One less obvious cause of cash flow struggles for businesses is an increase in inventory. Whether a business is actively buying new inventory or inventory just builds up over time, it takes cash to pay for that inventory. Again, businesses should have a plan for how much inventory they need and track inventory on an ongoing basis.
Even a profitable and growing business can have a cash shortfall if they experience a condition known as Fast Growth Syndrome. What, you can grow a business too fast? When a company is experiencing high growth, they typically need to buy more inventory. The higher sales in turn result in higher Accounts Receivables. If the time lapse between the inventory payment and the sales collection is too long, even a profitable company can find itself short on cash. And as they say, profits don’t pay the rent.
So, first do your homework and be aware of the potential cash crunches in your business. Commit to some basic tracking to watch for trends that could have a negative impact on cash flow. And lastly, it’s never too soon to have a back up plan in place. Look into getting a line of credit for your business or check into the availability of vendor terms on inventory. The best time to get money is when you don’t really need it.
Kelly Weaver is the Regional Director of the Small Business Development Center in Aberdeen which offers free, confidential business consulting to start up and existing businesses. She can be reached at (605) 626-2565 or firstname.lastname@example.org. The Center is hosted by GROW South Dakota (also known as Northeast South Dakota Community Action Program).
Category: GROW SD