Most professionals understand that to be profitable, the money that comes in must be more than the money that goes out. Cash flow is crucial to the success of a business, but it is often a sore subject for business owners. A whopping 82% of small businesses fail due to cash flow issues, making it the number one reason small businesses quit. But cash flow is far from simple because it can cover a wide range of problems. Read on to learn about the eight most common business cash flow problems and how CFO services can help you solve them effectively.
Why is cash flow important?
Positive cash flow allows you to grow your business by investing in startups or hiring new employees. Negative cash flow means more money goes out than comes in, which ultimately leads to failure. Cash is the lifeblood of your business, ensuring that payments are made for inventory, salary, rent, and additional operating costs. If your cash flow is suffering, CFO services can help identify the problem, which is the first step in finding a viable solution.
1. The cause of the problem is unknown.
It is usually not difficult to identify that you have a cash flow problem. When spending exceeds available cash, it is obvious that lack of cash becomes a problem. However, if you want to address the problem, you will need to identify the cause. For many businesses, a shortage of cash can arise without an immediately clear source.
Planning and organization are crucial to understanding your cash flow. Start by categorizing your expenses and writing down the percentages for each category. If the current distribution of cash doesn’t make sense for your business purposes or operations, you may be overspending in one or more categories. First, focus your efforts on reducing spending or making adjustments in the higher categories.
A financial professional, such as a part-time CFO, can provide valuable information for your cash distribution. They can offer expert advice on the current state of your cash flow distribution and suggest improvements. Plus, by hiring a part-time CFO, you can benefit from financial expertise without committing to a full-time executive salary.
2. The books are not organized.
Entrepreneurs and business owners are busy, which is why accounting often takes a back seat on the priority list. Unfortunately, disorganized books can cause a headache down the road. Inconsistent billing, lack of payment records, and disorganized billing can lead to lost money and serious cash problems.
Organizing your books takes time, but it can help you identify unpaid bills or other inconsistencies that are causing you to lose money. Implementing an accounting system can help ensure that your books are always up to date. This system can also generate reports that provide information about the financial status of your company to both you and your accounting team. If your team doesn’t have the talent to keep sufficient accounting records, a part-time CFO can be a valuable addition to your team.
3. No cash flow benchmarks have been established.
Are your budgets driven by data? Allocating money without a clear goal or reason is dangerous and often leads to cash flow problems. It’s easy to start a cycle of overspending, making it harder to cut back later. Researching your industry and the spending of similar companies can help provide a benchmark for your cash position. Be sure to identify companies in a similar life cycle stage to get the most accurate benchmarks.
This is another area in which a financial expert can be of value. Part-time CFOs have extensive experience in many companies. They can offer guidance based on their experience, especially when it comes to comparing your cash position.
4. The expenses are too high.
Many companies deal with this problem from time to time. Expenses can easily increase over time and often go unnoticed until a cash problem arises. To combat this problem, it is important to review your expenses on a regular basis. Understand the expenses your business pays consistently and determine which items can be cut or renegotiated. After completing your benchmarking, you may notice that you are spending too much compared to your competitors or the industry. This information can be used as a lever to renegotiate the terms of the contract for large expenses.
5. Bad debts accumulate.
If a small business does not have a credit monitoring system, bad debt can add up quickly. When customers owe money that cannot be recovered, cash flow problems are likely to arise. Once you’ve organized your books and implemented an accounting system, adding a credit control system is the next simple step. From email reminders and letters to working with a debt recovery company, there are many ways to reduce bad debt.
6. Credit terms are out of sync.
The periods for paying your suppliers must match the terms for your customers. By syncing your credit terms, you can better control your cash flow. When credit terms are out of sync, unexpected expenses have the potential to ruin your business or seriously cripple your cash flow.
Renegotiate the terms with your suppliers and customers if necessary to synchronize your credit terms. This can be a large and time-consuming project, but ultimately it’s worth matching your cash flow.
7. Cash flow is tied up in inventory.
If your cash flow issues aren’t related to overspending, your inventory or sales cycle may be to blame. Inventory of homes for long periods of time immobilizes your assets, reducing available cash and storage space. You should have the necessary amount of inventory on hand to fulfill orders while keeping items for the shortest period of time you can manage. It may even be necessary to analyze your sales and determine which products or services have low margins.
Your sales cycle can also help you predict your cash flow. Understand your entire sales cycle to accurately forecast your inventory needs and cash flow over time. It’s also important to identify the changing seasons for your sales cycle, so you can prepare ahead of time. A part-time CFO can help with this task by compiling various models and forecasts based on your company and industry.
8. Growth is happening too fast.
While growing your business is usually a good thing, runaway growth can lead to cash flow problems. Hiring additional staff or increasing your supplies in anticipation of more business can leave you with wages or bills you cannot pay. Uncontrolled growth leads to higher expenses before customers are paid, and these cash flow problems can cause your business to fail.
If you are interested in growing your business, a financial advisor can offer valuable information. With a wide range of experience, part-time CFOs can guide you through the process of growing your business at a steady pace that is sustainable over time.