Small business owners are known for their creativity, ingenuity, and the passion that compels them to turn their visions into reality, often against overwhelming odds. However, small business owners are also known for something else: A tendency to struggle with cash flow problems.
Cash flow issues strike terror into the hearts of even the most seasoned business owners. And it’s no wonder: Poor cash flow can put you out of business in no time. While not having the money to pay your employees or to cover this month’s rent is both nerve-wracking and gut-wrenching, small business owners take heart: With some solid research and planning, there will be be a solution to those persnickety cash flow problems.
Here, we’ll take a look at some of the most common reasons that businesses end up with cash flow problems, and provide you with the strategies to get your ship back on course.
The Whys and the Hows of Cash Flow Problems:
Adequate cash flow is necessary to keep businesses of any size afloat, but a recent Discover Small Business Watch survey found that an alarming 50% of small business owners report that they experience cash flow difficulties.
A business suffers from a cash flow problem when it spends more money than it earns. A business can find itself struggling with cash flow issues when sales are lower than forecasted for a given period or a large payment isn’t remitted on time, for example. While no business can operate in the red for too long, persistent cash flow problems often signal larger structural issues that small business owners would be wise to address ASAP.
If you find yourself unable to cover your business costs, you are suffering from a cash flow problem, but you aren’t necessarily captaining a sinking ship. Seem counterintuitive? Let’s look at an example:
Beth’s Biscuits is a local business selling organic dog treats in a variety of flavors. All the best-dressed pups at the dog park eat from Beth’s at least twice a week. Owner Beth recently received the chance of a lifetime: A spot on a nationally syndicated show that raved about her products. The phone hasn’t stopped ringing since.
Seems great, right? Well, here’s the problem with Beth’s rise to success: She knows the orders are going to keep coming in, but right now, she doesn’t have the funds to buy all the supplies and to pay her employees. She’s having trouble filling orders and dog-owners are getting angry. Beth has a cash flow problem, but not because she is a failure. Instead, Beth has a cash flow problem because she isn’t clairvoyant.
In order to remedy cash flow issues like Beth’s, many small business owners try to stanch the problem with a quick cash infusion from somewhere else. Whether this infusion comes from a personal account or some other form of asset reallocation, these temporary fixes are no replacement for a thorough examination of the how’s and the why’s of your businesses’ cash flow issues.
Strategies to Solve Cash Flow Issues:
Small business owners will recognize this scenario: Loyal customers paying late. As local fixtures with deep community roots, small business owners often hate to remind their customers when a bill has come past due. After all, without these loyal customers, you wouldn’t have any business to speak of at all, right?
Small business owners have to move past the idea that it is rude or pushy to remind their customers to pay their bills. Your customers pay up for their cell phone bills, their mortgages, and each time they go out for groceries. They understand that you expect to be paid for your services as well. If they miss a payment, sending another invoice with a personal note included or sending a polite email is not remiss.
However, even better than reminding clients to pay up is not having to remind them at all! Being smart about billing can help prevent cash flow problems. Here’s how to get started:
• Send out invoices that highlight clear “pay by” dates.
• Consider invoices that clearly state what the penalty is for a late payment. (You may recognize this tactic as a favorite of doctors and dentists offices!)
• Incentivize paying early or in cash with a slight discount.
Having a strict billing policy that you follow-up on and making it worth your customers’ while to pay immediately are valuable first steps on the road to an end to cash flow problems.
Develop a Relationship with Your Bank:
Banks aren’t known as the fuzziest of institutions and many business owners would rather do their own taxes than approach their bank for an additional loan. Afraid of appearing underwater, many small businesses risk actually going under when a twenty-minute conversation with their bank could yield immediate results.
Note: Approaching your bank should only be considered after you have tried to address other cash flow issues, however. If you can tighten up your ship by focusing on accounts receivable and payable issues, there is no sense in borrowing money at a less than ideal interest rate.
Hire a Finance Guru:
It takes a special kind of person to attend to all of the financial details of a company. This type of person is detail-oriented, doesn’t mind sending out invoices, pays bills on time, and probably has a finance or business administration degree.
If this doesn’t sound like you, you may want to consider hiring one of these sage finance gurus. Whether you hire a fulltime CFO or simply pay a bookkeeper for a few hours of his or her time each week, having someone who knows the ins and outs of your business’ finances is invaluable. Not only will this expert help you avoid cash flow problems, but you will have more time to dedicate to other aspects of your business.
However, never turn control of your books over to someone else entirely. It is fine, even prudent, to have a finance expert manage your books, but you need to retain an intimate knowledge of your business’ financial doings.
The Takeaway:
If your small business is struggling with cash flow issues, the worst thing you could possibly do is to ignore the situation. Instead, you need to face the situation head on and develop a solution. Your business means too much to you, your community, and your employees to do anything less. However, the good news is that solving a cash flow problem is often much easier than dealing with the fallout of one. And that is some serious motivation!
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Gary Shouldis
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