Even the most successful of businesses can run into cash flow problems. This is why sometimes you need to take a step back and work out what you could be doing better.
There is a lot of information on the internet about cash flow on the Commonwealth Bank website.
The following are five common ‘traps’ that businesses can fall into that can lead them to running out of cash. Avoid them and you will notice a significant improvement in your cash position, allowing you more time to grow your business.
1. Tying up capital in stock
If you are finding that you have excess stock, then you need to consider trying to sell it more quickly – even if it means selling it at a discount. This is especially true if some of the stock is seasonal in nature. If this is the case then consider selling it at a discount at the end of the season, rather than holding onto it for another year. An example would be a homewares store that sells beach towels – any towels at the end of summer could be sold off at a discount.
2. You are a victim of your own success
If your business is growing too quickly, then this can cause major cash flow issues. You may find costs spiralling out of control as you need extra equipment and staff to fulfil orders –but you have to wait until the orders are despatched and then wait again for payment. In these circumstances, planning is important. Consider asking for a partial upfront payment from your customer. If this is not feasible, you need to be able to predict your cash flow shortfall and speak to your bank or finance adviser about financing options. You could also consider crowdfunding options.
3. Buy long term assets out of your current cash flow
It can be tempting when you have a bit of spare cash flow to use it to buy that new piece of equipment that your business really needs. However, this can get you into cash flow problems very quickly and leave you short to pay your suppliers and staff. It is very important that you match the length of the loan to the life of the asset or consider leasing solutions instead of tying up cash.
4. Too many eggs in the one basket
If you only have a few (or even one) main customers you could be significantly increasing your risk of running into cash flow problems. Imagine the impact on your business if your main customer suddenly goes bankrupt. Even a major customer, knowing how important they are to your business, asks for longer payment terms (eg from 30 days to 45 days) this alone can cause you to experience cash flow issues. This is why it is important, when growing your business, to be mindful not to too become reliant on a single or small number of customers.
5. Not doing your homework
For every new customer that requests credit terms, thorough checks must be performed. You are better off saying NO to a customer rather than providing products or services and not being paid for them. Make sure credit application forms have been completed fully and an ASIC check has been done to cross check the information. It is estimated that around 25% of credit application forms have either been filled out incorrectly or purposely state incorrect information. Brodie Collection Services can provide ASIC checks from a low $46.30. A small fee for some peace of mind.