The problem with cash flow is real and it exists across the globe. More than 90 percent of companies in Africa, Middle East and Europe don’t even have a transparent view into their cash flow, while in the US, more than 80 percent of the business that fail, do so because of cash flow problems. In Australia too, poor cash management is one of the primary causes of businesses failure. What is it then, about cash flow that poses such a threat to business survival and what can companies do in order to ensure staying afloat in this shark tank? We’ll discuss that and try to find a solution.
Why does uneven cash flow happen?
Before we move on to how dangerous cash flow can be for your business and how to avoid repercussions, we have to make clear how inconsistent cash flow happens. This phenomenon can be related to outflow, inflow or both. Businesses can have irregular incomes due to slow-paying customers or seasonal fluctuations.
The outflow of money can also be uneven. While some bills and expenses are the same every month, some, such as insurance, can come every six months or annually. There’s also the question of surprise expenses, like equipment malfunctions or a new investment. These inconsistencies are usually managed from cash reserves or using a line of credit.
What happens when the cash flow is low?
The business landscape isn’t a fertile plain, it’s a rugged terrain with occasional ups and downs. And there will be time when the sales are poor and expenses are high. If you do have a steady amount of capital at these moments, you will be sure that you will eventually leave this difficult period behind, but if not, you may be left without funds to cover the costs of labor, materials and operations.
If you think that this is the end to your torments, you’re wrong. Lack of stable cash flow will limit your abilities to invest in research, development and marketing that can keep your business competitive. Your business will be condemned to stagnate while many opportunities that require investments are slipping through your fingers.
However, the worst thing about uneven cash flow is that once it happens, it’s difficult to get back on your feet again, which means that your business will end up in an endless loop of covering one payment after another.
How to even the odds?
If your business is suffering from the symptoms named above, does that means it is finally time to throw in the towel and start over again? Of course not. There is a solution that will help you meet your obligations to your vendors and facilitate your operations, and it is called invoice finance service.
This option allows you to sell your pending invoices, receive up to 80% of the funds upfront and avoid waiting for two months or more to get your cash. After, when your client hands over the payment in full, you will receive the rest of the money. Essentially, this is a less risky and more affordable way to cover your costs or invest money, without turning to unsecured loans.
How to manage cash flow more efficiently?
We have seen what to do when a problem arises, but how to prevent the problem from happening in the first place? If you want to ensure a stable income and survival of your business, here are some things to pay attention to:
Bookkeeping: well-organized, timely and professional bookkeeping will help you discover traps and issues in time to solve them.
Credit control system: this will reduce the likelihood of bad debts and help you collect money from clients more efficiently.
Profit: if cash is the king than profit is the prime minister enabling for the king’s crown to remain intact.
Cash flow forecast: this will help you predict which months may carry the problem of cash deficit and address this issue on time.
Reasonable growth: a sudden and fast growth can sometimes be bad for business since it requires more staff, material and more complex operations, which, in return, require more money.
While profit is an important parameter, it is not nearly as decisive as cash. Your business’s ability to meet the market demands, remain competitive, and even to survive, will depend mostly on consistent cash flow. To ensure its stability, you need to manage it thoughtfully and have backup plans for when the market isn’t on your side.