4 reasons why you have a cash crunch and how to avoid it
Keeping your cash flow healthy is essential for any business. As they say Cash is King, or as we like to say here: Cash is Queen.
You might find yourself in a tight squeeze now and then (or a lot) and wonder what’s going on - after all your business might have strong sales and be profitable.
We’ve broken down the 4 factors that affect cash flow in your business and how you can manage them.
1.Slow Invoicing and Late Payment
Late client payments or not invoicing clients promptly can really hurt your cash flow.
When invoices are not sent out promptly, your payment cycle is extended which basically means you’ll inevitably get paid later. This delays the inflow of cash that you need to cover expenses and invest in growth. Overdue payments from clients make it difficult to meet your payment obligations.
Offering payment plans to customers can be a great sales incentive but will also affect your own cash flows.While they can make your products or services more accessible and increase sales, you have to wait longer to receive the full payment which can strain your cash reserves.
Action Points
Invoice as soon as possible and chase overdue invoices.
Make it as easy as possible for clients to pay you on time with clear payment terms. Consider direct debits for recurring work and sending easy payment links.
If you offer payment plans, consider offering early payment incentives to balance out the cash flow impact.
2. Sales fluctuations
It comes as no surprise that unexpected drops in sales will cause cash flow problems as there is less money coming through the door.
However, timing is everything in the world of cash flow. Seasonal changes, big product launches, and shifts in demand can all affect your income.
For example, if you’re a creative agency you may see a big cash flow boost when you take on a large project for a key client but it may take some time to secure the next one. Similarly, launching a group coaching programme will might temporarily boost revenue and cash if you’re getting upfront but this may need to last until your next programme launch.
Action Points
Plan for these fluctuations by forecasting sales trends so you can anticipate periods of high and low demand
Build a cash cushion that will help you through slower periods and continue to meet operating costs.
3. Uncontrolled expenses
When expenses exceed revenue where costs are not controlled, this will cause an immediate cash burn in your business.
It can be easy to look at a seemingly large bank balance at a point in time and make spending decisions based on that figure.
However, this snapshot does not tell the full story. A large upcoming tax bill or an upfront supplier payment could quickly drain your available funds.
Action Points
Regularly review your expenses and make sure they align with revenue.
Look ahead and consider future financial obligations when making significant investment decisions.
4. Excessive Owner’s Drawings
Taking too much money out of the business for personal use can weaken your cash flow - whether this is as dividends, salary or director loans.
While we’re all here for rewarding yourself for your hard work, it’s equally important to balance your personal withdrawals with the needs of the business.
Action Points
Set a reasonable salary/dividends for yourself that aligns with the business’s cash flow.
Reinvest profits back into the business during leaner times to ensure stability,
Keeping an eye on these four factors and managing them well can help you maintain a healthy cash flow and set your business up for success.
Did you know we offer a cash flow forecasting service for our female founder clients? We’ll set an initial 12 month cash flow forecast, update it monthly and have a cash flow session every 90 days to plan ahead leaving you feeling calm & collected.
Sound good? Fill in our contact form to book a Discovery Call together.
