One of the greatest challenges for small business owners in their first year is managing cash flow. It is not surprising, given the significant start-up costs new businesses face, the uncertainty of receiving client payments in a timely manner, and a host of other issues that can blindside inexperienced business owners.
Fortunately, there are solutions for those looking for ways to solve first-year cash flow issues. A recent study showed that 29 percent of startup failures are due to a lack of cash flow, trailing only lack of market demand as the top issue plaguing entrepreneurs whose ideas do not make it.
Cash flow is defined as the money coming into and out of the business, usually reported in regular time intervals (monthly, quarterly, or annually). Insufficient cash flow can be a persistent problem for businesses beyond the first year, too. A 2010 Discover Small Business Watch survey indicated that 45 percent of small businesses expressed issues with cash flow.
Cash Flow Causes
Here are few of the common causes of cash flow difficulties.
- Poor Collections. Bad debts are a common culprit for cash flow problems. Customers that do not pay their bills, or do not pay on time, can disrupt projections and make it difficult for businesses to pay their own bills.
- Phased Credit Structure. Sometimes the cash flow issue is simply a matter of timing. If your business offers credit terms to customers that do not sync with the repayment schedules of their own credit obligations, it can mean your business is late paying its bills, incurring fees in the process.
- Faulty Bookkeeping. If your books are disorganized, you are operating with one hand tied behind your back. You want your books to be in good shape and reliable so you can tell at a moment’s notice where you stand financially.
- Not Enough Profit. This may seem like an obvious issue, but if you are not selling enough, or if your price points are too low, your profit margin will suffer and so will your available cash.
- Poor Forecasting. One of the most important things a new business owner needs to learn is how to forecast. Understanding anticipated expenses and anticipated revenue (and when that revenue is likely to be generated) can hinder not only growth but the sustainability of the business in the short term.
Good Solutions for Great Businesses
All of the issues around cash flows are solvable.
- Establish a credit control system. These systems are the process by which businesses collect owed monies. That means creating dedicated time to send out letters, emails, and other notifications to those who owe you money. It also means determining the length of time before the account will be turned over to a debt collection agency. Small businesses should also run credit checks on big customers before offering them credit.
- Use technology. Payment platforms such as Square, Shopify, and PayPal make it easier for your customers to pay you, meaning you have access to much-needed cash faster.
- Choose a low-overhead business. All businesses face both operating and fixed costs. Choosing a business that has fewer overhead costs, such as equipment, machinery, and space, means there are fewer fixed costs that need to be paid before your business moves from the red to the black each month.
- Understand the financial documents. In order to manage cost, you need a basic understanding of some basic accounting practices. Depreciation, fee structures, and loan terms all factor into profit-and-loss statements, income statements, and balance sheets.
- Just say no. Sometimes the best thing an entrepreneur can do is say no. When presented with a potential deal for your goods or services, be sure to understand the pay rate, margins, and payment schedules. You may want your lawyer to suggest payment language and negotiate payment timing terms that optimize your ability to use the needed cash.
- Finance your own business. One small business funding option many entrepreneurs are considering is leveraging existing 401(k) or IRA retirement funds. With the proper legal business structure, entrepreneurs can convert their retirement savings into cash in a matter of weeks. The good thing is this cash comes without any loan repayment terms or penalties for withdrawal.
Benetrends has worked with small business owners for decades to create optimized solutions using existing 401(k) and IRA funds. We help create the business entities, establish the retirement funds, and get entrepreneurs the cash that keeps on flowing. To learn more about what your small business may need, download The Definitive Guide To 401(k)/ROBS Business Funding.