Did you know 82% of businesses fail
due to poor cash management? That’s a scary figure. Contrary to popular belief,
cash flow problems can strike even growing businesses. Why? The biggest reason
is that a business must wait to get paid. Many an owner has had to refinance
their house for an emergency loan to keep their enterprise afloat. Sometimes a
merchant cash advance is more effective. Sometimes a business loan alternative
is the best option.
Most people think of profit as being the most important financial figure. But
it’s just an accounting concept – what you get leftover after you subtract
expenses; it isn’t the same thing as cash. For example, your money can get tied
up in account receivables. This can often cause cash problems but won’t come up
if you’re just looking at your company’s profit.
Management needs to pay attention to cash. Three figures are very especially
helpful
Payment days – How long your business waits to pay vendors
Inventory Turnover – How long inventory is taking up working capital and
slows down your business’s cash flow
Collection days – how long you wait to get paid from customers.
Always monitor these three financial figures and forecast them 12 months ahead
in time. Compare this plan to what happens and see if you can make
improvements.
Cash flow can be complex, and you shouldn’t try to calculate in your head or on
the back of a napkin.
There are a lot of moving parts. For example, if you’re buying inventory or
making sales on credit, cash flow takes a hit. Making sales does not
necessarily mean you are making money. Likewise, issuing an expense doesn’t
mean you paid for it already.
Because of its simplicity, many business owners like to use cash-based
accounting. But it isn’t always good and misses many things. Accrual accounting
allows you to see unpaid bills, spending on inventory and other items that can
destroy cashflow.
Business to business sales can be especially bad for cash. After you deliver
your service or good, it’s common for businesses to pay the invoice months
later. You might be tempted to take them to collections, but then they’ll go to
the nearest competitor.
This wait can be enormous. If you sell to a distributor who then sells to a
retailer, this wait can be 5-6 months. Unfortunately, this is standard practice
in most industries. The money a customer owes you is reflected in account
receivable, not in cash.
Likewise, inventory hurts cash well. Your supplier is not going to wait for you
to pay while your product to sell while it’s on the shelf.
What can you do? Working capital provides much-needed peace of mind. You can
use it to pay your running costs and expenses and buy inventory while waiting
for customers to pay their invoices.
There are some ways to mitigate these cash flow issues. Look into strategies
like offering a discount to customers for prompt payment, requiring prepayments
for customers and on-time delivery to keep inventory costs down.
Additionally, be sure to keep your bankers updated. They surely hate surprises.
So, let them know if there is a growth spurt or if you have problems with a
large customer paying. That way, they’re prepared if you ask for more
financing. Sometimes a business loan alternative will work.
Cash flow management is extremely important for a business. Owners ignore it at
their peril. Don’t end up as a statistic by ignoring these strategies. If you
need extra money for your company, you can apply for a merchant cash advance from
Everest Business Funding.
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