6 Effective Ways to Solve Business Cash Flow Problems
by Arnab Dey Business Published on: 08 April 2022 Last Updated on: 26 September 2024
Running a venture is full of challenges. Amongst all problems, facing and dealing with cash flow problems is one. Not every business owner is a financial expert with experience handling finance-related tasks. As a result, it can be tough for new entrepreneurs to manage and maintain a positive cash flow balance.
Having a positive cash flow is crucial for ensuring your business thrives in the corporate world. Not just that, cash flow problems might lead your business to fail.
Why is it vital for business owners to avoid cash flow problems? It’s necessary to prevent cash flow balances when running your business. Starting on the wrong foot can be challenging to recover from.
Cash is needed to carry on daily business activities like paying utility bills and other expenses, making it vital to look at your cash flow frequently.
Being unable to pay your bills on time will likely impact your business’s credit rating, influencing your ability to get loans.
Do you want to save your business from entering cash flow problems?
Here are some ways to help you manage your cash flow Problems:
1. Improve your trade receivables
Take a look at your finances. You might notice some outstanding invoices and realize that some customers aren’t paying you on time. If you think it’s okay to give your customers some leverage, remember that this can wreak havoc with your cash flow balance.
Hence, look for ways to improve the way you collect cash. Consider taking payments directly from invoices. Besides that, offer customers some discounts for paying ahead of time. Even if it affects your profit a little, it’s better to have cash in hand.
Moreover, keep a lookout for customers with bad credit. Credit risk is a part of running a business. But you can reduce it by asking your customers to complete an application before giving them credit.
2. Reduce expenses
Keeping tight control on your business’s expenses is a critical part of maximizing cash flow and profits in your company. You must evaluate where your company is now and where you want to take it.
A well-constructed road map can help you forecast your expenses and keep them under control, helping you maintain a positive cash flow balance.
Besides that, to ensure your expenses are low, you need to understand your historic costs before planning. It requires gathering data efficiently and effectively.
Moreover, take a look at your business’s variable expenses and calculate what percentage of revenue they represent. Consider reducing your expenses by saving money on insurance by comparing providers for the best rate.
Instead of eliminating paid advertising, look at some of the cheaper substitutes. You can build your customer’s emailing list and execute a referral program.
3. Manage your payables
For any business, accounts payable is one of the essential tasks. After all, every company needs to pay what it owes! When it comes to your payables, the most important thing is to pay only the business invoices that are legitimate and accurate. It might sound obvious, but it’s vital.
Before you process a supplier’s invoice for payment, remember to check whether the invoice shows precisely what your business ordered. Check if your business has received the goods or services billed.
Getting all the details right helps you ensure the accuracy of your accounts payable, avoiding paying more and affecting your cash flow balance.
For cash flow, budgeting and decision-making, it’s essential for you to know what you owe, who it’s owed to, and when the due date is. To ensure a positive cash flow balance, consider extending the payment cycle of your vendors.
4. Maintain a clear view of inventory
Managing your inventory helps you identify which and how much stock to order. It tracks your inventory from purchase to the sale of products.
Such a practice helps you identify and react to trends to ensure there’s never too much or too less stock to fulfill customer orders.
In contrast, your money can get tied up in the inventory without keeping an eye on it, affecting your cash flow balance. Hence, to ensure your inventory is managed effectively, consider using technology to speed up tracking and ensure that inventory records are correct.
In addition, you can categorize your inventory into priority groups to help you understand what you need the most. It helps you from spending all your money on inventory, preventing you from paying for other business tasks.
Moreover, 80% of your profit is likely to come from 20% of inventory as a general rule. Prioritize inventory management of this 20% of products as these are the items that make you the most profit; don’t fall short in them.
5. Create cash flow forecasts
Cash flow forecasting is a crucial tool for every business. a cash flow forecast helps you see cash gaps before they hit, allowing your clients to make plans to avoid them.
It helps you keep on top of consistent late payers. Not just that, creating a cash flow forecast allows you to see whether there is spare cash in the bank.
You can use this cash to invest in new markets or repay loans. As an entrepreneur, it can help you understand when you can reach your revenue goals and targets.
To create an effective cash flow forecast, you need to identify the expenses needed to operate the business and expect the timing of every payment. Cash outflows relating to investing and financing activities must be included, for instance:
- wages and salaries of staff
- purchase of new equipment
- loan repayments
After you’ve done all the calculations, it’s time to run some ‘what-ifs’ situations on the complete forecast to decide how much capacity it has to withstand unpredicted events.
6. Get financial expert advice
Your business can run into trouble fast if it doesn’t have cash in hand to spend, no matter how much profit it earns. As a result, you can hire an accountant to take care of the cash flow while concentrating on other essential business tasks such as marketing.
Experts like accountants can discuss ways to save money and maintain a positive cash flow, improving your business’s efficiency and profitability.
The accountant might have experienced most of the cash flow issues and challenges you face, helping you resolve them. Your accountant can outline the possible opportunities and alert you to any risks involved, helping you manage your cash flow effectively.
Final words
Maintaining a positive cash flow balance is crucial for making your business thrive in today’s business world. Therefore, create a cash flow forecast to keep an eye on cash inflows and outflows. Besides that, consider reducing your expenses and managing your inventory.
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