Got A Small Business Cash Crunch? Try These Cash Flow Problem Fixes Now!
Every small business at some time starts to experience a lack of available cash into its coffers, through many causes –having too many product orders to fulfill, keeping employees’ salaries in line with inflation, needing to rent more office space, even keeping disgruntled clients and customers happy by offering discounts. What is the solution to these everyday business problems? You guessed it, regular cashflow into the business, it’s the lifeblood of any business. And like any blood supply, it has to be kept healthy - and that is achieved by proper cashflow management, so that you can meet the operating expenses of the business. Here we are looking into how you can quickly deal with the ebb and flow of cash into your business.
About Cashflow
Small businesses are the very foundation of business in the USA today. Small businesses (defined as businesses with fewer than 500 employees) account for 99.7% of all business in the US. (Fundera) and small businesses (firms with 1-499 employees) continue to add more net new jobs than large businesses (500+ employees) (SBA.gov).
Here is the bitter pill to swallow – most small businesses fail within the first five years, but a recent study by Jessie Hagen of U.S. Bank, cited on the SCORE/Counselors to America’s Small Business website found that 82% of the time, poor cash flow management or poor understanding of cash flow contributes to the failure of a small business. Other factors cited in the study included
70% – Not recognizing or ignoring what they don’t do well and not seeking help from those who do
77% – Not pricing properly or failure to include all necessary items when setting prices
79% – Starting out with too little money
78% – Lack of well-developed business plan, including insufficient research on the business before starting it
Another startlingly obvious, but overlooked problem that causes failure is that small business owners allow expenses to exceed existing cash. Easy to say, but if you are a startup ( and bear in mind that $10,000 is the average amount of startup capital required by a small business owner, per SBA.gov), it is inevitable that in the early stages your expenses will outstrip your income. You have marketing to do, have administration costs, third-party contractors to pay and building stock and a client base. Another great way to save capital expenditure is to lease business equipment. You will find that if, as a potential lessee, you decide to use enterprise lease management to make decisions on leasing terms and financing, then you will probably have a greater understanding of the lowest market-driven leasing rates that may be available to you.
Also note that Finimpact quotes small business statistics which cite that the rate of failure for small business enterprises is 20% in year one, 30% in year two, 50% in year 5, and 70% in year ten.
This is where planning and forecasting becomes essential, to work out how much money you have to cover the operating expenses that exceed your income, and for how long your business resources can carry that deficit. In every small business there will be lean times, so the more careful you are with your planning, the better you will able to ride the waves and grow the business
Don’t Hurt Your Cashflow By Doing This…
1. Don’t be lackadaisical in collecting invoices – if your clients are not paying you on time, it’s going to hurt you badly. Make sure you have solid policies and contractual terms in place from the get-go, with penalties for late payment and procedures for chasing the bills.
2. Don’t assume that your sales will hit or exceed targets – be realistic based on past numbers and current market trends. You may get a bump on sales from a viral social media post for example – but is that a sustainable marketing plan for the future, or, as is often the case, just a flash in the pan?
3. Don’t go over the top on spending – especially if you are a new business, it will be tempting to spend that little bit more on a widget or trinket to make your workspace look and feel nice – but is it really necessary. If you save money where you can now, you’ll get closer to the break-even pint by every dollar that you save.
4. Don’t use guesswork - never skip doing a considered cashflow forecast (see below)– track it day to day and month to month, and a statement will help you keep track of the trends, such as holidays and events that can affect consumer spending on your products.
5. Don’t spend your rainy day cash supply – keep a savings cushion of at least two month’s’ operating expenses, to help safeguard against an unexpected blow that may cripple your revenue for a month (we went through that in the aftermath of Hurricane Irma for example)
So What Can You Do To Improve Cashflow?
OK, so you know that you have a cashflow problem. What do you do next? Many entrepreneurs try to raise money by loans, such as leveraging their house by increasing their mortgage. Some may use constructive ways to get loans by obtaining a title loans against the value of their car from https://checkintocash.com who will give a cash advance based on the value of your vehicle, the size of the loan, state and ability to repay the loan. Others may use a side hustle to produce some additional revenue from outside the business.
Whatever you decide, here is some quick guidance about what you should do to avoid or dig your way out of a cashflow crisis.
Sell More
However, many entrepreneurs have limited credit available to them, and try to increase their sales. It sounds like a sound strategy; after all growth equates to more revenue, and increased cashflow wouldn’t it? Well not always – business growth may increase revenue, but it also increases overheads to cover the increase in production, and they may swallow your available cash reserves faster than you may get paid from increased sales. So when looking to increase sales, be careful to assess the impact it will have on increased overheads, keep a look at the available cash to finance growth, and do your planning. Consider increasing sales of the quickest to produce, lowest production cost, and fastest-selling products first.
One great way of producing regular additional sales is to set up a subscription service for your customers or clients, and by utilising a subscription platform like billforward.io the management of recurring billing can be surprisingly straightforward. Think about it - if you can find 1000 members who pay just $25 per month subscription fee, that equates to revenue of $25,000 per month!
You have to do your homework and do the most accurate forecast possible to assess the overhead costs of increasing production and sales. Do a detailed forecast and the cost-benefit of each item of expenditure based upon the best information possible:
1. Assess the categories of expenditure – what are you going to be spending and in what categories are you using those funds (marketing, cost of goods, operations etc.)
2. What are your benchmarks for spending – how are other businesses in your category spending their marketing budget for example, and how much are you going to have to spend to compete?
3. Examine your spending under a microscope – where can you trim your budget? For example, it may be worth spending more effort to try and lower the costs of goods than advertising to reduce your overheads. If you are spending more without a defined purpose and goal, you are throwing money down the drain. Consider the business benefit of every dollar that you spend and the potential return in terms of increased efficiency, cost of customer acquisition and of course, your increase in revenue.
The careful planning and cashflow forecasting that you put in now may seem both arduous and a waste of time, when you feel that you could otherwise be working in your business - but that effort it will pay major dividends in the efficiency of your business. You’ll be better positioned for success. You’ll be better prepared to reap the benefits, and deal with the difficult times that entrepreneurship inevitably entails. So start now!
ABOUT THE AUTHOR
Jim Mckenzie is a lifestyle entrepreneur dad of 7, a business strategist at www.amemediagroup.com and the co-founder of www.birthandbeyondmagazine.com