Studies show that cash flow mismanagement is one of the most common causes of failure in small and medium-sized businesses (SMBs).
In its simplest form, cash flow is the money coming in and going out of your business. Positive cash flow means more money is coming into your business than going out, whereas negative cash flow is the opposite.
A Capital One study found that 42% of small business owners list cash flow management as their top concern. If not properly handled, cash flow problems can result in things such as late payroll and the inability to pay vendors, suppliers, or employees. It impacts an SMB’s ability to continue moving forward and can damage your reputation in the eyes of clients and possible partners.
Common cash flow problems for SMBs
This can all be reversed if caught in time and even completely avoided in the first place, but before we get into the best practices, let us look at these common cash flow problems.
- Not keeping enough cash reserves
- Not having a section in your business plan dedicated to cash flow
- Growing too fast
- Not tracking your cash flow projections correctly
- Pricing is too high or too low
- Spending money your SMB does not have (overspending)
- Not having or not keeping up with your monthly budget
- Having too many expenses
- Excessive customer credit
- Low profits
- Too much inventory
- Not keeping up with your taxes
Cash flow best practices and solutions
There is a solution to every problem, and most of them can be avoided from the beginning by following these general best practices.
- Keep 3-6 months of cash reserves to safeguard you from unexpected events, such as damage that needs to be fixed immediately, dips in the economy, or clients not paying on time.
- Train your customers to pay on time. Invoice as early as possible.
- Do not try to grow too fast. Growing too fast when your business’s cash flow is not ready for it can be detrimental to your success. A best practice to keep in mind is to only grow as fast as your cash flow allows. Do not put yourself in the negative trying to meet the demand for your company or your aspirations. Just remember the old saying, slow and steady wins the race.
- If there is ever a time to become a planner, it is when you become a business owner. Planning is so important in business. Make the plan, re-evaluate the plan, and review the plan either weekly, monthly, quarterly, or all the above. It is everywhere and in everything. You cannot get away from it, so do not even try.
- Pricing is critical to ensure you have healthy margins and cash flow; make sure you are pricing to drive profitability. Research your own business, and then research your local and regional competition. Are they pricing based on their brand name (from brand loyalty)? How good is their product, and how do their customers feel about the product vs the price?
- Consider accounting software. Be sure to do your research and find the best-vetted software tool for your needs. It does not have to be the most expensive or one with all the bells and whistles. Find the one best for your business and for your needs.
Every SMB owner needs cash. Regardless of how much revenue your business brings in each month, it is critical not to have too much of your cash tied up in unsold inventory or receivables. Maintaining a positive business cash flow gives you the ability to meet your financial responsibilities and the flexibility to grow when the time comes. We hope you found these best practices helpful. If you have any questions or want to share your experiences within the Markaaz SMB Community, leave your comments below.
Join Markaaz and track your cash flow on the Dashboard.