Cash flow problems are one of the biggest reasons that businesses fail, and they only get worse with time. If you want your business to succeed, you need to identify and correct common cash flow problems quickly, before they become unmanageable.
We’ve pulled together this list of some of the most common cash flow problems faced by businesses and, more importantly, what to do about them.
1. Underestimating Startup Costs
Starting a business is an unpredictable world, and it’s easy to watch costs run away from you. Getting a budget in place before you start is crucial if you want your business to succeed, and if you have unrealistic expectations of how quickly your business will take off or don’t have the cash on hand to fill the gap, you could be out of money before you’re even open to customers.
The solution is more careful budgeting before you start a business. If you’re not sure what your business is going to need, the Small Business Administration has created a worksheet that should help you create a budget for your business.
2. Overestimating Profitability
You’d like to think that your business will be so attractive that you’ll have customers lined up around the block from the moment you open, but that’s almost never true. Ramping up business takes time, and you’ll be operating at a loss for a little while.
One survey found that only 68 percent of businesses turn a profit in their first year, while 84 percent reach profitability in the first four years. If you’re not prepared for several years of losses, you’ll suffer from serious cash flow problems.
3. Failure to Budget
Budgeting isn’t fun, but it’s important. You need to create a budget, either yourself or with the help of financial advisors, for the next 30 days of your business. Remember, a cash flow forecast isn’t the same as a typical day-to-day budget — it’s about predicting when your biggest sources of income and expenses will come through. If you want enough in the bank to pay your bills when they arrive, you’ll need to look ahead.
4. Overlooking Overhead Costs
High overhead costs can sink a business. You want a big, shiny office with brand-new computers and an impressive reception area, but high rental costs, car leases, and travel can cause your costs to balloon out of control. Keep overhead costs as low as you reasonably can until you know you can afford to upgrade.
5. Collecting Too Slowly
So you’ve got customers, and those customers are buying what you’re selling. That’s great! But how long before their check actually clears? It’s easy for new businesses to want to be accommodating, but if you’re waiting months to collect, that’s months without money in the bank to pay your own bills. Make sure you’ve set up a receivables process to ensure that you’re paid promptly, and only extend credit to customers that have a habit of making prompt payments.
6. Growing Too Quickly
Let’s say you reach for the stars and land a huge client — bigger than any you’ve had before. That sounds like a good thing, but you can’t accommodate the new workload, so you have to hire a few new people. When payday comes, you don’t have the cash on hand to pay their salaries because you haven’t been paid by the big client yet.
One way to avoid this kind of problem is with a line of credit. Banks will often lend you the money when they see a letter of intent or a service contract with the new big client, so you can get enough to cover your short-term costs and then pay it back when the new client’s money starts coming in.
Talk to the Experts
Your business is important to you — it’s your life’s work, your passion, and probably a substantial source of income. If you want it to survive, thrive, and be there for you when you retire or pass it on to the next generation, you need to keep it healthy, and that means paying attention to cash flow.
At First Western Trust Bank, we don’t stereotype our clients based on their age and income — we examine every facet of your assets, liabilities, goals, and values to make sure that you’re set up for success. If you’re ready to take your financial future seriously, get in touch.