It’s not a secret that most small businesses fail within afew years after starting. In many cases, poor cash flow management or poor understanding of cash flow led to the failure of a small business.
So, how do you know if you have a cash flow problem? There are diverse reasons to assess cash flow based on your industry and your company’s lifecycle stage. One key is relevant to businesses regardless of size or industry: if expenses exceed your cash, you have a cash flow problem and require a cash management system.
Ways to handle your cash flow issues
Note that expenses during growth stages are often greater than actual revenue since you’re still trying to go to market, validate R&D, and figure out admin costs, sales & marketing, and contractor relationships. Remember that your company can only succeed once you finally bring in more than you spend.
If your small business experiences a cash flow problem, does that mean you need to focus on selling more? Not necessarily
Tim Berry, an entrepreneur,shared on Entrepreneur.com that one of the toughest years in his company was when they doubled sales and almost broke. They built things two months in advance and took in profit from sales six months late.
Adding growth to the mix can feel like a Trojan horse, hiding issues inside a solution. Of course, you want to grow, but you need to be careful since growth costs cash. It’s a matter of working capital. Faster growth means additional financing and better cash management solutions.
You need to look at multiple factors instead of just a “sell, sell, sell!” mindset to reverse a cash flow problem.
Categorize spending. The first step is to assess what you need to spend and where you can spend it. Categorize expenses into G&A, R&D, Operations, Sales & Marketing, COGS, and check if anything stands out. Check the percentage spends for each category, and scrutinize whether the cash distribution makes sense.
Benchmark. It would help if you had a clear picture of how businesses spend and utilize the benchmarks. Consider businesses in your industry and businesses in your company’s lifecycle stage. You don’t want to spend more cash than you have, so modify your budget based on your available cash regardless of benchmarks.
Forecast. Forecasts are vitalwhen it comes to cash flow. As your business grows, a detailed forecast will ensure that you can achieve growth in an efficient, stable way.
From implementing benchmarking to knowing when to bring in extra cash from financing, a forecast will aid in taking out the guesswork and put the business on astrategicpath. Developing a detailed forecast will help drive a budget for your company, serving as one of the most impactful steps toward intelligent cash flow management.
How does your cash management banking partner help
Top banks offer diverse digital cash and liquidity management solutions to help businesses like yours manage treasury and finance operations with greater ease and efficiency.
Typical offers include:
- Digitalize your payments, collections, and reconciliation processes
- Maximize surplus cash with a range of global liquidity solutions
- Optimize cashflow with our working capital advisory service
- Gain insights to improve your cash position with our Treasury Prism analytics platform
- Co-create digital solutions to address pain points with API solutions