I’ve written about the debt problem and cash flow management as they relate to individuals. What if those individuals are business owners? Some of the issues and habits that cripple individuals from effectively managing their personal cash flow are the same for business owners.
No matter how great a salesperson you are, what a great product you develop or what excellent services you provide, your business will flounder if you fail to effectively manage the cash flow of your business. Poor cash flow management is cited as a leading cause for business failure.
Here are seven common cash flow problems that business owners face and sometimes create that can hurt their business and may lead to business failure. Some are tied to each other.
1. Overspending or Impulse Spending
This can happen at any time and can be particularly problematic when starting or expanding a business. You buy things you may not really need, certainly not right away. You don’t have enough cashflow coming in to offset expenses and you don’t conduct a critical cost-benefit analysis of your purchase.
2. Lofty sales projections
You dream about future success. You believe your great ideas, talents and services will generate a lot of business. Potential customers may not feel as strongly about what you have to offer or may defer decisions to spend on your offerings. Outside forces may impede your ability to sell your products and services. The reduced flow of money coming in may hamper your ability to pay for your overhead, let alone your personal living expenses.
3. Too much inventory
This is an offshoot of the first two problems. You tie up your capital in inventory. You may face storage costs as well. If you don’t sell your inventory quickly, you may need to discount the sales price or worse yet, write it off.
4. Unpaid invoices from clients
You may be slow in billing customers and collecting receivables. You may not be tough enough about payment policies, terms and penalties. You may not communicate effectively with customers upfront about paying you for products and services. You may not have tested policies and procedures in place to manage your customers’ credit.
5. Inadequate cash on hand
Any business can hit some bumps along the road. It’s not unusual for any business to have revenues that aren’t steady all year round. A slow period may mean that there isn’t enough cash to cover the overhead. If you don’t have a cushion of cash to cover your expenses, your business may suffer very quickly.
6. No funded contingency plans
Things happen. You get sick or hurt. Something happens to a key employee. Someone goes after your business when they suffer a loss or damages. Construction, the weather or some peril may hamper or halt your ability to operate. Are you insured for all of these things? You may be obligated to pay up when things happen. Where does the money come from?
7. No tested, cash flow management plan
Money goes in and money goes out. You just don’t know when or how much at any given time. There’s no tracking system to help you anticipate when those tough times may come, how to deal with irregular flows of revenue and unusual expenses, and help you determine whether you have the cash and coverage to pay for it all. Surplus situations can turn into ditches of business debt. That may impact your personal debt challenge.