How to Avoid Cash Flow Problems for Your Business and Simple Solutions

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May 2019

Does your business have a healthy cash flow? Tracking the money flowing into and out of your business helps you maximize profit and avoid pitfalls.

Understanding your cash flow, and identifying potential problems, is far easier than many business owners realize.

What is Cash Flow?

Every successful business not only makes money but spends it, too. Cash flow is the movement of money into and out of your business. It’s usually measured monthly, quarterly or annually.

Monitoring your cash flow allows you to avoid a variety of potential problems related to bills and expenses. Fortunately, most cash flow problems have fairly simple fixes.

Organize Your Bookkeeping

The daily duties of providing a product or service already keeps you busy. It’s easy to let proper record keeping slide. But staying on top of invoicing and record keeping prevents tons of costly financial mistakes.

Organization is key. Clear, consistent invoices aren’t just appreciated by customers, but they also provide an easy way for you to stay delinquent payments before they grow out of control.

You’ll need to consider both payments received from customers and payments made to vendors. Make sure you’ll have cash on-hand when it’s time to pay any monthly vendors.

Avoid Bad Debts

Bad debts are ones which can’t be recovered, and even small amounts can cause big problems for businesses.

A credit control system helps you keep track of, and collect, outstanding invoices. Your credit control system can be as simple as scheduling a regular time to email payment reminders to customers. It can also involve hiring a debt recovery firm to track down delinquent payments.

Simple, consistent attempts to recover outstanding payments usually yield the best results. Bad debts typically occur when clients (either individuals or businesses) declare bankruptcy.

Depending on your industry, you might want to conduct credit checks on potential clients. If a client has poor credit, you can mitigate risk to your business by asking for an initial deposit or issuing multiple partial invoices that need to be paid at set points throughout a project or assignment.

Sync Your Credit Terms

Your business has two types of credit terms:

• Terms set by your customers

• Terms set by your suppliers

For example, you might give your customers 30 days to pay outstanding invoices. But each month you also pay a supplier in the middle of the month. A situation could develop where you’re short on cash when you need it, even though you’re not losing money overall. This is called a negative cash flow.

You have a few possible solutions:

The best option is usually renegotiating terms with customers or suppliers. Of course, it’s doubtful change will be immediate. However, you can change your invoicing terms for new clients or renegotiate terms with supplies when creating new contracts.

In the meantime, try offering customers a discount for early payment. Even just 10% is often enough to incentivize many customers to settle their bill right away.

Another option is to increase your working capital with short-term lending. A fast infusion of cash can keep your finances steady until you’re able to sync your credit terms. A negative cash flow can quickly spiral out-of-control, even if your business is technically turning a profit.

Avoid Fast Growth

Growing your business is great, but growing it too quickly can cause major problems. Issues often occur when a small to medium-sized business lands a large client. Be careful when hiring new employees or purchasing new equipment to quickly expand production capabilities just for one client.

Ideally, incoming funds should arrive early enough to cover increased production costs. You don’t want to be in a situation where you spend a bunch of money then must wait for months before you can deliver a finished product and invoice your client.

Increase Working Capital When Needed

Many cash flow problems are an issue of timing, so a fast infusion of funding is often an effective solution. Working capital allows you time to reorganize credit terms, survive bad debts and expand your operations for larger clients.

A short-term loan or line of credit from a bank can be an option, especially if you have contracts relating to a large client order. However, bank loans are rarely fast or easy to get, especially if you have not-so-great credit.

Another option is a merchant cash advance. Requiring only a simple application with three months of bank statement, you can be approved and receive between $5,000 and $750,000 of working capital in your account within three days.

Merchant cash advances offer a high degree of repayment flexibility, which makes them ideal for helping cover cash flow problems. Repayment is directly connected to sales revenues, so you’re not racing the clock to complete large projects or renegotiate vendor contracts.

Cash flow problems will likely occur from time to time, and can take you by surprise. Fortunately, proper planning and organization, along with a merchant cash advance, can help your business flourish financially.