Poor cash flow management is a leading cause of businesses (both big and small) failing in Australia.
It is not only new businesses that encounter cash flow problems, but also ones that have been operating for many years. There are a lot of reasons why a business runs into a cash flow problem. Here are some of the lesser known ones you should keep a lookout for – so you don’t end up another business failure statistic.
1. Assuming because your business is growing that you won’t have cashflow issues
It is easy to think that because your business is growing that you don’t have to worry about your cashflow. Unfortunately, this is wrong, as a lot of the time expenses grow at a faster pace than sales when a business is in a growth phase.
New staff need to be hired, stock has to be purchased, and moving to bigger offices are just some of the expenses a business has when they are in a steep growth phase. This means when you are in a growth phase that you need to keep a closer watch on your cashflow.
2. Your cashflow is going well so you ‘set and forget’ your account receivables
Just because your customers have always paid on time in the past does not mean they will continue to do so. That is why you must constantly monitor your accounts receivables and follow up on late payers as soon as their accounts are overdue.
You also can’t assume that new customers will pay on time just because they say they will. It is important to do a credit check on new customers BEFORE providing services or goods. This includes having the customer complete a credit application and guarantee form. This should be verified, along with an ASIC check.
Brodie Collection Services can assist with providing both credit application forms as well as performing ASIC checks.
3. Too proud to let suppliers know that you are having cashflow problems.
It is easy to make cashflow problems even bigger by not being upfront with your suppliers. As soon as you know that you are not able to pay an invoice on time talk to your supplier. More than likely they will agree to a payment plan. This is a preferable option to using a payday loan (or something similar) where excessive interest rates are charged.
Remember that your supplier’s cash flow will be impacted by you not paying your invoice on time, so it is best to give them as much warning as possible.
4. Forgetting about the seasonality impact on your cashflow
New businesses especially, can underestimate the impact of seasonality on their cashflow. Christmas and the January holiday period are a boom time for some businesses but the worst time of year for others. Also, some businesses do well over summer, but others do better over winter.
For this reason, you need to make sure you carefully plan your cashflow so that you do not run out during your ‘quiet times.’ It will save a lot of stress over the long term.
By keeping an eye out for these issues, you will reduce the risk of poor cash flow and be better equipped to handle problems when they arise.