This is the second installment in our “Cash Flow 101” series—our ultimate guide to help you understand and manage your business’s cash flow, and prevent future cash flow problems.
Need to catch up? You’ll find links to the previous installments in this series at the end of the article. And, you can download this free cash flow example to see how cash flow works within a business.
Though they’re by no means uncommon, cash flow problems can cripple businesses of all sizes, and smaller ones are perhaps more vulnerable. Without access to capital, companies are unable quickly adapt to today’s ever-changing business world. As such, they’re unable to grow.
The good news is that cash flow problems aren’t entirely out of your control—and they’re not unpredictable, either. Proper budget forecasting, coupled with an understanding of symptoms that might indicate cash flow problems are in your future can help you protect your business from scrambling to figure out where to get its next infusion of cash.
If your business is suffering from any of the following five symptoms, cash flow problems may very well be on the horizon.
1. Your accounts receivables are high
While it might feel great to extend lines of credit to your customers, if they’re not paying their invoices promptly, what’s the point? Yes, your accounts receivables may be high, but you won’t have access to that cash right away.
And, who knows when or even if you will? When your accounts receivables are high, you’re essentially giving your clients interest-free loans. It doesn’t sound too good when it’s phrased that way, does it?
To see whether your business is doing well with collecting its accounts receivables, consider keeping track of your receivables turnover ratio (net credit sales over average accounts receivables balance). A low ratio might indicate it’s time to reassess how you do business.
2. You have too much inventory on hand
Businesses that sell their products to other businesses may like to have a lot of inventory on hand to ensure they’re able to accommodate orders of all sizes. But if a majority of your funds are tied up in that inventory and your customers aren’t racing to buy all of it, your business may have a hard time growing until sales are made.
To ensure your company has the products it needs to grow on hand while also being able to access cash when needed, it might be worth taking a look at whether it’s time to revise your order cycles, reconsider how many product quantities to keep in stock, or make use of inventory optimization tools, among other things.
3. You’re overextending your business
Though you might be very eager to grow your business quickly, it’s important you make sure to do so at a reasonable rate. If you overextend your company, chances are a lot of your cash will be tied up in capital and operating expenses, leaving your business less flexible in the short term.
To avoid having to deal with the problems related to overextension, be sure to thoroughly plan your growth well in advance. You might also want to consider reexamining your business processes to see what aspects of your organization would benefit from automation. But remember, the key to successful business growth starts with having a crystal clear vision of what you hope your organization will accomplish when you start expanding.
4. Your sales are declining
Maybe the economy is in shambles. Maybe you’ve got a lot of new competition. Whatever the case may be, if sales have been steadily declining over the last few quarters, there’s a good chance your profit margins are getting sliced as thin as possible—if they still exist at all.
Since your overhead costs likely won’t change, declining sales may indicate that cash flow problems are imminent. To combat declining sales, you might want to adjust your strategy. When was the last time you redefined your customer personas or looked at updating your messaging? How customer-focused is your brand? Today’s technology-driven world changes quickly, and your business has to keep up if you want it to survive.
5. Your business just isn’t profitable
At the end of the day, if you’re spending more money than you’re taking in, it shouldn’t take a rocket scientist to tell you that you’ll probably have cash flow problems sooner or later.
If you find yourself in such a position, you might want to reexamine your business model to see how it can be changed to enhance profitability. For starters, you could get creative and figure out how you can lower your expenses; for example, you might find that moving your computing infrastructure to the cloud will save money and increase productivity. It might also be time to think about whether it makes sense to increase your prices.