Small business owners face more challenges that larger corporations during a bad economic climate. In fact, the unpredictability can be worrying and this means it’s essential to prepare. This can ensure you don’t run into problems with cash flow. Your revenue is everything and while having a profitable month is fantastic, it’s not going to ensure you make it through an economic downturn. After all, small businesses still have staff to pay, rental agreements and other commitments. Let’s take a look at how problems can happen and how you can protect your business.
Causes of Poor Cash Flow
One of the main reasons for poor cash flow is simply a decrease in revenue. Every business has its ups and downs; some slower months may have been predicted, as well as some unexpected twists in the road. Either way, it can affect how much cash is available. In addition, expenses you weren’t expecting can affect the books. For example, if there’s flooding or a piece of equipment breaks, you’ve got no choice but to carry out the repairs.
Late payments from clients can have a negative effect. If they default on their debt, this means fewer funds for you when you need it. In turn, it can affect you paying your bills too. While offering credit is a good way to build sales, it does come with a risk and late payment is a common problem.
Watch out that you don’t overtrade. If you’re trying to expand your business before you’re ready, this can affect cash flow. What happens is that you increase resources and payments before you’ve received cash from new customers. You may be hit by a seasonal business trend, which leaves you in a bad position. The last thing you want to do is then borrow money and can’t pay it off.
You may experience poor cash flow if your overheads are too high. Of course, you need to pay things like and utility bills to keep your business running. But if expenses start to get too much without you realising, this will mean you make less profit. It’s best to review all your expenses regularly to avoid this from happening. Often, there are cheaper options you can swap to.
Ways to Protect Your Business
Season changes are something that affects every business. This means that certain times of the year or even your location can disrupt the cash flow. While these factors are often out of your control, making sure that you maintain a healthy business during these spells can make sure that you don’t have to close your doors prematurely.
First, pinpoint and recognise where the seasonal shifts are for your business. It’s important to be honest and work out the best times for profit and when the slower months are. Looking at your records can help you decide, but if you don’t have any, you can always examine general statistics from your industry. Businesses that are similar to yours in terms of size and location will help you figure it out. It’s best to start keeping records if you can.
You’ll be aware of what your fixed expenses are. But it’s also necessary to examine the variable costs of your business. It’s easy to overlook them, yet it can be these figures that impact on your cash flow. So, take the time to examine any fluctuating costs such as insurance premiums and tax payments.
There are going to be times when your business incurs an unexpected expense. Perhaps emergency repairs are needed or your services have had a bad month. Instead of worrying about it, you can be more productive by considering alternative funding to combat the issue. For example, you can consider using a short-term business loan to help through the difficult time. This cash injection can be used for expenses you have to pay in the meantime.
Staying on top of finances is always advised. This means creating a calendar and documenting every month. This is going to give you an insight into your business’s cash flow so that you can keep up. It’ll allow you to interpret when cash shortages may arise and when you can expect higher cash flow. Remember that ups and downs in business are normal. It’s best to be honest and accurate when it comes to finances so that you can make informed decisions for your business.