Lack of sufficient cashflow due to long payment terms or late payments can turn an expanding business into a failure in short order. Research from the Australian Securities and Investment Commission (ASIC) shows that more than 50% of new businesses will stop operating within the first 3 years. This, we believe, is largely due to poor cashflow management. If there’s no cash to fund future operations, there’s not much hope of survival.
But what are the main causes of these cashflow issues for small businesses?
A situation where your business starts to experience declining sales, leading to declining profit margins, can have a strong negative effect on cashflow. Even if the situation is temporary, adjustments must be made in order to stay afloat. Make sure your business is prepared for such things as seasonal changes in sales, or the loss of a key customer. Your customers almost always have the option to go elsewhere, so staying in touch and making sure the service/product delivered is meeting their needs, is key. This is especially true if you are dependent on one large client.
Competent business management and organisation is vital to your success. If you feel like you lack the expertise to manage your business finances, you should consider bringing on an experienced professional to help. Business, in the end is all about earning a profit on the work you’ve done, and if your business experiences a sustained period of no or low profits, that is you are spending more than you are bringing in, failure is inevitable. The importance of understanding and continued monitoring of financial statements cannot be understated. You or someone in the business, must be monitoring profitability through Key Performance Indicators, productivity measures, efficiency of your processes, and business spending. Be sure to take action if one of these areas is declining in quality.
If you’ve provided a service or product and are not being paid in a timely manner, this can also present a big cashflow problem for your business. Negotiating favourable payment terms is a very important part of making sure your business succeeds. More often than not, larger customers will negotiate very favourable payment terms for themselves, such as only agreeing to pay you on 60 or even 90-day terms, putting your business under strain. If you find yourself in this scenario, know that outside the traditional bank financing options, there are new, more competitive, easier and faster options available for your business to get the cash you need.
Competent business cashflow management as well as management of other aspects of your business’s finances, paying attention to the details of your operation and knowing the options available to you for help when you need it, are fundamental to business survival and prosperity.