Most professionals understand that to be profitable, money coming in must be more than money going out. Cash flow is crucial to the success of a business, but it is often a sore subject for business owners. A whopping 82% of small businesses fail because of cash flow issues, making it the number one reason small businesses fold. But cash flow is far from simple because it can cover a wide range of problems. Keep reading to learn about the eight most common business cash flow problems and how CFO services could help you solve them effectively.
Why is cash flow important?
Positive cash flow enables you to grow your business, investing in new ventures or hiring new employees. Negative cash flow means that more money is going out than coming in, which ultimately leads to failure. Cash is the lifeblood of your business, ensuring that payments are made for inventory, salary, rent, and additional operational costs. If your cash flow is suffering, CFO services can help identify the problem, which is the first step towards finding a viable resolution.
1. The cause of the problem is unknown.
Identifying that you have a cash flow problem is usually not difficult. When spending exceeds available cash, it is obvious that the lack of cash becomes a problem. If you want to tackle the issue, though, you will have to identify the cause. For many businesses, a lack of cash can arise without an immediately clear source.
Planning and organization are crucial to understanding your cash flow. Start by categorizing your spending and noting the percentages for each category. If the current distribution of cash does not make sense for your business goals or operations, you may be overspending in one or more categories. Focus your efforts on reducing spending or making adjustments in the higher categories first.
A financial professional, such as a part-time CFO, can provide valuable insight for your cash distribution. They can offer expert advice on the current state of your cash flow distribution and suggest improvements. Also, by hiring a part-time CFO, you can benefit from financial expertise without committing to a full-time executive salary.
2. The books are not organized.
Entrepreneurs and business owners are busy, so bookkeeping often takes a backseat on the priority list. Unfortunately, disorganized books can cause a headache in the future. Inconsistent invoicing, a lack of payment records, and disorganized billing can result in money lost and serious cash problems.
Organizing your books takes time, but it can help you identify unpaid invoices or other inconsistencies that lose you money. Putting an accounting system in place can help ensure your books are always up to date. This system can also generate reports that provide insight for both you or your accounting team on the financial state of your business. If your team does not have the necessary talent to maintain sufficient accounting records,, a part-time CFO may be a worthwhile addition to your team.
3. Cash flow benchmarks are not in place.
Are your budgets based on data? Allocating money without a clear goal or reason is dangerous and often leads to cash flow issues. It is easy to start a cycle of overspending, which makes it more difficult to cut back later. Researching your industry and the spending of similar companies can help provide a benchmark for your cash position. Make sure to identify companies in a similar lifecycle stage for the most accurate benchmarks.
This is another area where a financial expert can be valuable. Part-time CFOs have a wide range of experience with many companies. They can offer guidance based on their experience, especially when it comes to benchmarking your cash position.
4. Expenses are too high.
A lot of companies deal with this issue from time to time. Expenses can easily climb over time, often going unnoticed until a cash problem arises. To combat this problem, it is important to scrutinize your expenses on a regular basis. Understand the expenses your company pays on a consistently and determine which items can be cut or renegotiated. After you complete your benchmarking, you may notice that you are overspending compared to your competitors or industry. This information can be used as leverage to renegotiate contract terms for large expenses.
5. Bad debts are piling up.
If a small business does not have a credit control system in place, bad debts can pile up quickly. When customers owe money that cannot be recovered, cash flow issues are bound to occur. Once you have organized your books and put an accounting system in place, adding a credit control system is a simple next step. From email reminders and letters to working with a debt recovery firm, there are many ways to reduce bad debts.
6. Credit terms are out of sync.
The periods for paying your suppliers should align with the terms for your customers. By syncing your credit terms, you can better control your cash flow. When credit terms are out of sync, unexpected expenses have the potential to ruin your business or seriously cripple your cash flow.
Renegotiate terms with your suppliers and customers if necessary to bring your credit terms in sync. This may be a large and time-consuming project, but it is ultimately worth it to even out your cash flow.
7. Cash flow is tied up in inventory.
If your cash flow problems are not related to overspending, your inventory or sales cycle may be to blame. Housing inventory for long periods of time ties up your assets, reducing your available cash and storage space. You should have the necessary amount of inventory on hand to fill orders while holding items for the shortest time period you can manage. It may even be necessary to analyze your sales and determine which products or services have reduced margins.
Your sales cycle can also help predict your cash flow. Understand your sales cycle fully to accurately forecast your inventory needs and cash influx over time. It is also important to identify seasons of flux for your sales cycle, so you can prepare in advance. A part-time CFO can assist with this task by compiling various models and forecasts based on your company and industry.
8. Growth is happening too quickly.
While growing your business is typically a positive thing, uncontrolled growth can lead to cash flow problems. Hiring extra staff or increasing your supplies in anticipation of more business may leave you with wages or bills you cannot pay. Uncontrolled growth results in higher expenses before you receive payment from customers, and these cash flow problems can cause your business to fail.
If you are interested in growing your business, a financial advisor can offer valuable insights. With a wide range of experience, part-time CFOs can guide you through the process of growing your business at a steady rate that is sustainable over time.
Dallas L Alford IV, CPA is a licensed Certified Public Accountant in the state of North Carolina and owner of K-38 Consulting, a consulting firm that provides part-time and interim controller services, CFO services, SOX audit services, SOX compliance services and general accounting services. To learn more about K-38 Consulting, you may visit their website at https://k38consulting.com or contact Dallas L Alford IV, CPA 910 262-4412.
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