Good cash flow helps keep a business alive whereas poor cash flow can result in it sinking. In actual fact, poor cash flow is one big reason why one in every four businesses doesn’t make it past one year and why more than half of businesses don’t make it to five years.
Lots of new business owners push their bookkeeping to one side because they’re so busy with the huge work load of setting up their business. If your books aren’t organized, then this can lead to trouble. For most businesses, the only effective way to get the books in order is to use an accounting system and to keep it up to date. Bad debts are amounts owed by customers that cannot be recovered. These can cripple a new business and can easily occur if a proper credit control system is not put in place early on. A credit control system is the process that a business has in place to collect money owed by customers. If you are good at keeping your books in order then creating a credit control system can be very simple too. Also, to reduce the chance of bad debts, you could conduct credit checks. If you find that a customer has a poor credit record but you still want to take them on as a client, then you could ask for a deposit up front or issue partial invoices they can pay as bits of the work are completed.
If the credit terms you have set your customers are out of sync with the credit terms set by your suppliers, then negative cash flow can build up and worsen over time. For example, if your customers have 30 days to pay you but your suppliers need to be paid within 14 days then a cash flow problem could build up. In situations like this, you can put certain measures into place such as factoring (where a financial institution will lend your business short-term cash that is secured against the value of the invoices you have issued) or early settlement discounts.
Lack of profit can also lead to a lack of cash. If your business is losing money, it’s vital to uncover the cause of any losses and address them as soon as possible. Possible solutions to becoming profitable may be to increase your prices, increase sales or gain better control over your expenditure.
Most people want to grow their business, but sometimes growing too quickly can cause cash flow issues that can be detrimental to the business. To avoid this, you could access a line of credit from the bank, such as an overdraft or short term loan. Then, once your client pays you, you can pay down your debt, which means that you only have to pay interest to the bank for the amount of time you actually need the cash.
Businesses typically face one or more of the above cash-flow problems – especially when starting out. Paying close attention to these issues, and developing solutions to keep cash flowing into the business, will help ensure success within your business.
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