Cash flow issues are a common cause of business hardship and failure.
While some industries may be more prone to cash flow problems than others, no business is one hundred percent immune.
In this article we’ll look at:
- The importance of cash flow
- How to recognise cash flow problems early
- Common negative cash flow business models
Why Cash Flow Is Crucial To Business Success
Your company’s ability to generate a consistent and sustainable positive cash flow is a key ingredient to long-term business success.
Of course there are the obvious needs for positive cash flow, which include paying suppliers, employees, taxes and other expenses.
But having surplus cash flow is also the key ingredient that allows businesses to grow and prosper.
Investing in new equipment, technology, staff, marketing strategies and business development projects are all part of growing a business and they all require you to have excess cash flow on hand to pay for it.
But what happens when you don’t have enough cash flow to grow your business?
Or even worse when you don’t have enough to sustain your business?
Well the first thing you need to do is identify that poor cash flow management is the cause of your current problems.
How To Recognise Cash Flow Problems
Often when businesses are suffering poor cash flow management it can be misinterpreted as a problem with some other area of the business.
Poor management, bad accounting and slow paying customers are often diagnosed as the cause of a problem, when they are actually the symptom of poor cash flow management.
If you cannot pay your suppliers, staff and taxes, or direct debits you have set-up from your business account are not being honoured, then these are clear indicators that you need to look at your cash flow management.
Common Negative Cash Flow Business Model’s
It is far to common for business owners to unknowingly set themselves up with a negative cash flow business model. Of course this leads to many serious problems, which we described above.
So what are the most common ways that you can find yourself in a negative cash flow business model without knowing it.
- You offer credit terms of 30, 60 and 90 days to you customers, but have to pay for your stock or supplies upfront or within 14 days of purchase. This model means you’ll always be cash flow negative and living on borrowed capital to keep your business running.
- You pay for stock (often imported from overseas) weeks or months before it arrives in your warehouse/store and you are able to on sell it to your customers.
- You get paid via progress payments which also have long credit terms, meaning you get paid months after you have delivered the products or services, and paid your subcontractors, suppliers and other expenses.
Any of these models will eventually lead you to financial ruin, so if you identify with these scenarios it’s important that you re-structure your business in a way that will help you become cash flow positive.
Ensuring you update your payment terms so you are getting paid quickly is one of the fastest ways to improve your cash flow, and can quickly relieve financial pressure on you, your business and your family.
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