Cash flow provides the necessary fuel to propel your small business forward. Cash flow problems can lead to an insolvent business structure and are a leading indicator of a failing business.
Here are 7 of the most common causes of cash flow problems in small business and solutions to help you avoid them:
1. Lack of Payment Term Discounts
Waiting for a customer to pay once you have delivered a product or completed a service can cost your business valuable money. Offer your customers a term discount such as 2% net 10, or 1% net 5 in order to encourage them to make their payments quicker to receive a discount.
2. Lack of Tracking
Tracking your business results is crucial to its overall success. Install tracking systems in the areas of your business where you can improve cash flow such as inventory management, supply ordering and procurement to reduce waste and improve turn around times.
3. Failure to Perform New Client Credit Checks
Ensure that your new clients have credit checks before your business ships out product to avoid an untimely payment or a payment default from a business with a poor credit history.
4. Lack of Credit Insurance
Failure to have credit insurance, especially when working with customers internationally, can cause the business to lose substantial cash flow if the customer is slow to pay or defaults. International customers are also more challenging to take financial action against. To learn more about how to handle bad business debts, read my article called 5 Ways to Handle Bad Debts.
5. Slow Product or Service Turnaround Times
Shorten the delivery times of your products or services to your customers to maximise the level of potential profit.
6. Taking Cash Instead of Credit
Change your business structure to where your only methods of payment are credit cards or online banking systems to decrease the wait time for business payments by check.
7. Failure to Leverage Factoring or Inventory Financing
Failure to leverage these financing solutions when your business is producing or manufacturing a product or service for a client, can cause the business to suffer a short term cash flow problem. Consider leveraging factoring for the customer’s order or inventory financing for the required purchase of inventory to product their product or service to help your company’s short term cash flow problem.
Learning from these 7 common cash flow mistakes and applying the relevant solutions will help your business to improve cash flow and avoid potential insolvency. For more information on how to improve your cash flow, read my article called Proven Tips to Improve your Cash Flow.