Statistics show that one in four new businesses fail to make it in first year. Most common problem is cash flow. Cash flow is the money that flows in and out of a business. A good cash flow keeps a business going, a bad cash flow makes a business eventually to fail. Let just take a simple example what is good cash flow and what is bad cash flow. If you spend on rent, suppliers, and pay roll £5000, in a month, but you earn from sales £4000, here we have cash flow problems, so bad cash flow £1000. On other hand if we spend £ 5000 but we earn £7500 then this is a positive cash flow.
What are some of cash flow problems and how to react to them?
1. Bookkeeping problems.
A small business has an huge amount of work when just start. Usually the managers or the owners have a lot to deal with. They work hard, put all the energy and efforts to make it work. For some it seem to be making money. The business grows. That is all good. Then suddenly they start receiving bills and more letters from suppliers for falling behind payments. Here we facing two problems. First option the business is only drawing cash, no growth at all, Second option the business been growing but their books are disorganized. Maybe there late payments not received from customers. Make sure that your books are in order. Register all the money coming in, and all money going out. Good book keeping is very important to measure your cash flow.
They are also so called bad debts. This occurs when customers miss their payments and start falling behind the schedule. If not managed carefully it affects the business growth. It also shows that the financial side of the business requires qualified accountants. Setting a good book keeping and developing a proper credit control system is important from the start. Sending reminder emails and letters to customers and passing the old debts to debt collect agencies the credit control make it easy to keep control over cash flow.
3. Terms and conditions problems.
Setting wrong terms and conditions with suppliers and clients also can affect the cash flow of your business. This means if you set that your customers have a 30 day to pay but your suppliers want you to make payments in two weeks then the cracks will show in your cash flow and it will get worse if not fixed. You should interfere and negotiate with clients maybe give a little disscount for early payments to avoid cash flow problems.
4. Profits heading down.
When a business is not making profit then you have a cash flow problem. Most owners in this case inject a sum of cash into the business from previous profits. But to sustain a business need to make enough money. So you must find why is the business struggling and address the issues. You might try to increase sales or rise prices and keep a better control on spending.
Your accountant will provide you with a cash flow forecast. Then you know how much money your business is going to need in six month, or even in first year to survive. This is important because make you prepare for situations ahead. Cash flow forcasting is a valuable resource that helps making decicions like when you can invest and when you need to cut expenses.