It's estimated that about 9 out of 10 small businesses fail due to poor cash flow. To properly manage your cash flow, you need to fully understand where your cash is coming in and where it's leaving. In addition, it's imperative that you're aware of long-term implications so you aren't caught off guard by any surprises caused by these four cash flow problems.
1. Late Payments
Late payments are one of the main causes of cash flow problems for small businesses. Small business owners typically operate with tight budgets and rely on payments being completed on time in order to pay bills and scale. In reality, the majority of clients will pay late. It's estimated that on average, small business owners are now waiting 72 days for payment on invoices. Waiting over two months for payment can seriously put your business in danger, especially when you're relying on cash for growth.
A great way to avoid late payments is to get up to speed on the best practices for billing. A great start is to use a cloud-based online invoicing software for all your billing needs. There are plenty of online payment solutions that provide invoicing tools optimized to get your bills paid on time. These solutions provide means for accepting multiple forms of payment, following up with clients, and easily accessing invoice records and reports.
2. Lack of Profitability
According to Small Business Trends, only 40 percent of businesses are profitable. Additionally, only 30 percent will break even, and the other 30 percent actually lose money. Lack of profit tends to be one of the main reasons why companies fail.
While there is a correlation between poor profitability and cash flow problems, issues can still arise for companies that are in fact making a steady profit. If your company has high business expenses and is constantly looking to reinvest profits, you need to be extra wary of cash flow issues. Plenty of companies were forced under despite raising millions of dollars due to the simple fact that they were unable to generate steady cash.
The best way to avoid these issues is to always be on the lookout for profit-making opportunities. These include adding new products or services, product markups, consulting work, and offering discounts and deals to increase traffic.
3. Withheld Investment or Funds
Locking in an investment or a loan to fund your business is always a great feeling. However, it does come with some rather serious contingencies. If you haven't been able to meet expectations or your income is much less than you projected an investor or bank can withhold a portion of your funds. This can become a huge cash flow issue, considering you're most likely reliant on those funds to cover major expenses until you're able to generate extra cash. This is especially alarming in the event of an emergency, such as a piece of equipment breaking, resulting in a large capital expense for your business.
The best way to avoid this problem is to give yourself a bit of breathing room. When you initially ask for a loan or seek investment, always ask for 25 percent more than you "project" as well as a line of credit. This way, you can cover yourself in the event of any unforeseen event or emergency.
4. Tax Filing
Whether you're a monthly, quarterly or annual tax filer, it's your responsibility to file the correct amount of taxes on time. Tax filing itself isn't a cash flow issue; however, if you don't file correctly or on time, it can be extremely detrimental to your business. If you file late or incorrectly, you are subject to interest payments, penalties and even an audit from the IRS. Not only are these penalties and fees expensive, but they take up tons of valuable time that could've been spent scaling your business.
The best way to avoid these issues is to stay on top of tax deadlines and consult with a tax specialist. Most business owners are busy enough as it is, hence why it's a good idea to delegate tax work to a professional. Not only will a tax specialist assist in preparing your taxes and filing on time, they'll also help you find potential tax deductions. When tax time comes around, make sure you have enough cash in the bank to pay them off. While you may not have the exact dollar amount, you can build a basic model based on last year's taxes vs. your growth for the current year.
Regardless of the size of your business, managing cash flow can be quite stressful. Despite this, solving your cash flow issues doesn't have to be all that difficult. If you take necessary precautions and remain educated on your specific cash flow needs, then you're on the right track. Keep these four cash flow problems in mind and make sure to avoid them at all costs.
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