Undoubtedly, the phrase “negative cash flow” is one that you’ve heard repeatedly. Unfortunately, it’s what keeps business owners most awake at night. At best, it may haul down your long-term savings. At worst, it can sink your business.
Let’s begin to define a bad cash flow situation. First, it’s typically apparent that you’re consistently making more expenditures than you earn.
For example, you received $4,500 in cash last month, but you owed $5,000. Therefore, this left you with a negative cash flow of $500. If that occurs once or twice because of unforeseen circumstances compared to when it’s happening a lot, you can usually work with it. Still, if it becomes consistent, you have to please take care to avoid it for the sake of your business.
Fortunately, there’s a lot you can do to prevent negative cash flow. Here are some of the most common reasons and methods to fix it.
Your profit is the source of your cash. It usually comes from payments from customers or the sale of your properties. If your small business is unprofitable, you won’t have enough cash to cover your expenses. This may lead to you borrowing more money than you can repay or even closing your business.
You may not be generating large amounts of profits because your marketing and sales operations aren’t working well, you have low staff productivity, you’re not charging enough for your products, your ordering and delivery processes aren’t going well, or you’re not reducing costs.
After freshening your marketing strategies, it may be time to update your website, product range, or social media pages. Or consider participating in trade shows. These events are a fantastic platform for launching new products.
Encourage your staff to improve by setting up appropriate incentives. This could be in the form of prizes, food, or cash rewards and bonuses.
It can be fun to indulge our rich inclinations to purchase things we do not need, especially if we have money. But spending money without regard for your priorities will only result in depletion of cash reserves, jeopardizing your ability to afford the items that matter.
Before investing in new equipment or high-end systems, evaluate your company’s unique needs. It’s always wise to prioritize your must-haves and nice-to-haves list. Be sure to stick to it when you’re optimistic about what you need to purchase to keep your business moving forward at total capacity.
Expanding Too Fast
Expanding your business too quickly without having a financial plan or sufficient capital could put you at a financial loss. For instance, cash flow might become an issue when your bakery tries to set up a new retail location before you increase your profits or when you make your rent before you’re ready for it.
Letting your company grow too rapidly may neglect your existing operations. On the other hand, if it happens to be prosperous, expanding your business can also be tempting, even when you have inadequate funding to handle that growth. Still, the added revenue could negatively impact your cash flow.
As a general rule, set up a monetary budget and keep a separate bank account for emergencies. At the same time, performing a monthly cash flow analysis is beneficial.
A cash flow forecast is like your budget program, where you plot all your business receipts and expenses over a specific time frame (we’d recommend weekly or monthly). It will help you take control over your expenditures and make sure you can make those investments for expansion.
High Overhead Expenses
Unless you turn your profits into products for sale, your overheads are ongoing costs that aren’t directly associated with the production and sale of your products. Some examples may include your workplace rent, internet service fees, and other utility bills. These expenses are vital for keeping your doors open. However, they might hurt your cash flow if they start ballooning. In addition, if your overhead costs rise significantly, it can become more difficult for you to keep up with your billable hours as your business grows, and you might ultimately run out of money.
Look at your expenditures regularly and be mindful of your expendable expenses. As you write down every item, focus on what you need. Then, consider which items are truly invaluable and tie up the rest.
If you still depend on something, ask yourself whether there’s a more cost-effective alternative. For example, you can learn to move to a place with less rent or switch to a different service provider.
Spending money on unexpected expenses or changes can cause trouble meeting your cash flow targets. Usually, these changes are spontaneous and not included in your cash flow forecast. In summary, you can’t allocate money to cover these changes, and that expenditure is unpredictable.
A few of the most common unexpected expenses are loss of employees, spoilage of equipment, and an increase in competition that puts your company in the position of needing to invest in new equipment or technology.
Cut out as many unnecessary outgoing expenses as possible. Even if your expenditure is small, you will still free up funds to accommodate your unexpected expenses, even if just a tiny amount. If you have a monthly subscription or annual subscription that you no longer use, cancel it. Create admin tasks that will tremendously cut down on your expenses if you delegate their execution. The aim is to remove all that isn’t necessary to your business so you’ll be able to have more working capital for emergencies.
Too High Withdrawals or Borrowings
This occurs when you take out too much capital from your company or borrow finances but haven’t obtained enough earnings to cover them. Sure, borrowing large amounts of finance may prevent you from running short on assets in the short term, but you shouldn’t let it postpone forking over hefty sums later. In addition, your cash flow may worsen if you cannot work on your loan repayments. Remember, loans have fluctuating interest rates and may involve short-term repayment schedules.
Follow your budget. When money is tight, take any financial decisions that won’t harm your bank record or the money you have for emergencies. Reserve as much as possible so that you have something in reserve, at least six months’ worth of operating costs. The best practices are to set aside six months of operating expenses and maintain smooth cash flow.
High or Low Product Pricing
Your product pricing also affects your cash flow because it may lead to low profitability. If you set your prices too high, nobody will buy your products. If you select your costs too low, you won’t be able to generate the revenue needed to maintain your business open. It’s all about equilibrium.
Reestablish prices to remain competitive. Compare how much you’ll need to charge your existing clients to consider what kind of services and products you need to offer to increase revenue.
If money is not flowing smoothly into your business or your cash flow is poor, look into your inventory immediately. Too much inventory or overstocking can tie up an enormous amount of money and also take up valuable warehouse space. On the other hand, you want never to stock too much of your ingredients or products.
Products that have remained sitting for a long time can become archaic and obsolete, thus causing you to lose money.
Develop an estimate for the weekly or monthly amount of retail orders you’ll likely receive to compute the right amount of products you should move out, so you can always stay fully stocked.
Managing your stock is critical. Be sure always to review it, even if you’re inspecting it on a regular schedule. A simple way you can do this is by utilizing an excellent inventory control system. It may be an unnecessary cost, but inventory control software can give you the capability to identify the items that don’t sell and gives you the ability to make inventory forecasts so you can be appropriately out of stock or overstocked. In other words, it is critical to make investments if you want to spend less.
It can be a danger to the health of your business to keep up poor cash flow. So remember to budget carefully, forecast well and focus on your accounts payable to ensure your cash flow remains healthy and under control.
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