One of the pillars to success as a small business owner is good management of your finances. Maintaining the finance function in your business is about more than securing a profit at the end of the day (although it is important). In Quickbook’s recent study, a shocking 69 percent of small business owners were worried about keeping their business cash flow moving, and dating back as far as 2015, cash flow problems were credited in the demise of 25 percent of small businesses in America. Fast forward to 2018, and according to CB Insights, that number has increased to 29 percent. It is clear: an organization’s cash flow practices are significant; they can have a direct impact on its success and sustainability. Poor management can cause a domino effect, influencing all other functions of the business and creating severe obstacles for small businesses.
The Seasonal Cash Flow Issue: Forecast To Regulate Your Business Periods
It is a common myth that seasonal businesses are the only ones that grapple with cash flow management. Cash flow problems can affect any small business owner, and not just seasonal ones. It is commonly thought that those with fluctuating activity levels would be the businesses that find themselves having to work a bit harder to keep their cash moving in those down periods. However, seasonal businesses such as restaurants, retail stores or boat rentals are more prone to cash flow problems arising thanks to periods of low or no income. There are several ways around these dilemmas that can help those small business owners match their income to their expenditure periods. One such way is to forecast your expenses and bill customers in advance. Forecasting financial costs ahead of time means you can account for it in your busy season, which lessens the pressure in those off-peak seasons.
A Compromised Payment Record Can Influence Your Financial Creditability
Almost 66 percent of small business owners said that the aspect that would most affect cash flow was the time spent waiting for payments. As time lengthens, there is a domino effect on other functions such as payment to creditors and suppliers. This leads to a myriad of other complications. Firstly, it impacts your supplier relationship, and can evoke higher interest charges or the breakdown of the trading relationship. For suppliers, be sure to have an open and honest conversation with them; many are willing to establish payment plans or establish arrangements with extended deadlines. Your invoicing system will also play a large part in keeping your receipts flowing. Regular checks and invoicing upgrades can reduce the delay in identifying late paying customers and improve the timing of action being taken.
Secondly, as cash flow issues arise and cash shortages become apparent, owners will need to seek additional capital from other sources to fund the shortfall. However, many financial institutions check business’ credit records, business plans and financial records for a stipulated period when considering their decisions in loans or even business credit cards. Late payments and notices will appear as irresponsible and present your business as a risk to lenders, which limits your access to capital and automatically raises the cost of securing capital. For these businesses, having strict and effective debtors policies including followups is essential in keeping invoices on time. As for financing, there are specialized local financing institutions available on the market today, offering financial services for businesses experiencing financial difficulties. A final solution is to secure trade references, which can go a long way in building trust with a potential lender.
Employee Management & Retention Is Impacted
Another vital part of any business is its employees and the HR function (specifically payroll and employee retention). Poor management of cash can leave employees vulnerable to late payments or even nonpayments. It is also the ideal recipe for employee dissatisfaction and demotivation. For employees, their salary paid is then translated into their own personal cash flow. Therefore, by having cash flow issues in your small business, you are indirectly attributing to your employees’ financial difficulties. Approximately 32 percent of small businesses said they have paid their employees after their intended pay dates, and with 4 in 5 workers living paycheck to paycheck, even the smallest delay can majorly affect their personal finances, including credit records.
This also brings up the question of employee retention; with a shortage or misplaced cash, there is limited capacity to hire additional workers (and facilitate plans to expand) or even retain the current ones. As a result, you may find employees overworked and unpaid, feeling demotivated and unappreciated. Finally, it can lead to small business owners wearing too many hats in the business. Communication with your employees is key in this instance.
Above all, cash flow problems require pragmatic thinking and a solid financial plan. Built-in buffers in both expense budgets and retained earning can be lifesavers in those periods of cash shortages. Finally, seeking the advice of a financial adviser can provide fresh ideas for business owners looking for solutions while securing collaborations, or a business partner can provide that influx of cash needed to smooth out the transition. However, in the end without rigid money management policies in practice, you may find yourself in the same situation again later down the road.