TIPS FOR THE SMALL BUSINESS DEALING WITH CASH FLOW ISSUES
If you are a small business, it is almost inevitable that somewhere along the line you are going to run into cash flow issues. It’s important to understand the causes of cash flow problems to minimize their occurrence and their severity. We can break down the underlying causes of cash flow problems into three groups: self-induced; client induced; and stuff happens.
Self-induced cash flow problems are the easiest to fix. These can range from paying too much for things, improper planning of expenditures, not waiting long enough to purchase things, or even paying your bills too quickly. Since you have control over these things a simple modification in behavior can overcome these types of cash flow problems.
Client induced cash flow problems have solutions but cannot be solved frivolously. Let’s say your biggest client starts taking 60 days to pay you instead of 30 days. You can, of course, request they go back to 30 days, but often times they are paying you late because: 1) they can and 2) they are doing so because they have their own cash flow problems. If you push too hard, they might just decide to order elsewhere the next time around. Perhaps a better solution is to look into invoice factoring (spot factoring) where you sell your client’s invoice to an invoice factor at a discount for immediate cash. This solves your immediate cash flow problems and doesn’t back your client into a corner.
The final group of cash flow causes is the “stuff happens” criteria. You have major and unexpected repair bills or medical bills. You have a bad sales month. Your supplier takes an extra month to send your prepaid order to you. A natural disaster impacts your business. You can’t plan for, or schedule, these events. You can’t stop them from happening. All you can do is scramble and deal with them as best you can. The financial hit from “stuff happens” is usually harsh and its timing disastrous. Sometimes, companies never recover from a “stuff happens” hit, but it’s a lot easier to recover from such a hit IF you’ve taken care of the self-induced and client induced cash flow causes previously.