Avoiding a Cash Flow Crisis
One of the leading causes for small business failure is lack of liquid assets. Without cash, businesses cannot pay for their medium and long-term investments and in the worst case scenario it means they cannot meet their regular obligations such as their employee payroll.
THERE ARE TWO WAYS TO LOSE A BUSINESS:
- HAVING TO PAY OUT MORE IN EXPENSES THAN RECEIVED IN INCOME.
- HAVE A SUCCESSFUL (PROFITABLE) OPERATION BUT RUN OUT OF CASH.
CASH FLOW IS THE ABSOLUTE KEY!
An undercapitalized business may be one that cannot afford current operational expenses due to a lack of capital, one that is over-exposed to risk, or one that is financially sound but does not have the funds required to expand to meet market demand.
The success of any small business relies heavily on proper capital planning. Failure to acknowledge the importance of capital planning will haunt small business owners before start-up, soon after start-up, during economic downturns, annual cycles and business expansions.
Avoid problems through proper planning. Estimate your income-versus-expenses in advance. Know exactly when deposits will be made and when expenses need to be paid. This becomes more difficult when you need to carry a large inventory or when clients are allowed to pay you later. Money tied up in inventory or unpaid customer invoices is not money in the bank. A way to avoid undercapitalization is to create a realistic assessment of the business expenses and projected financial needs. Based on this assessment, you can draft a cash flow projection which will help you more accurately estimate the funds needed to stay in operation.
The best time to avoid undercapitalization is when you aren’t undercapitalized. Visit lenders with your projections when you still have sufficient cash and establish a line of credit as a safety net.
Cash Management and Planning
Cash is the lifeblood of a business. Managing cash flow efficiently is one of the most important tasks for any business owner. The goal of cash management is to maximize the availability of cash not invested in inventory or fixed assets. If for any reason, a business cannot pay its financial obligations then it’s insolvent. Insolvency is the primary reason for businesses going bankrupt.
What can you do to avoid cash flow problems?
- Create a realistic cash flow budget.
- Intensify efforts to collect outstanding payments owed to the business.
- Offer small discounts for prompt payment.
- Monitor and prioritize all cash disbursements.
- Liquidate superfluous inventory.
- Assess areas where operational expenses may be reduced.
Tagged cash flow management