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Why cash is king for small businesses

The strange thing is you can have a full order book and see that your business is really taking off, but if you don’t have a firm grip on the cash flow situation you could struggle to stay afloat and achieve long-term success.

It is important to understand why cash flow matters so much to a small business and to have a strategy on how to keep your bank balance in the black.

Here is a look at what impact a lack of cash flow can have on your business and an overview of some of the common issues plus some tips on how to keep money flowing regularly so that you can not only survive but make positive future plans.

Problems getting paid

Regardless of what type of business you run you need to ensure you get paid promptly for your goods and services as you will have regular bills that you need to settle each month and the only way you can do that efficiently is by paying attention to your cash flow.

If you are running a trucking business, for example, you may have sourced your vehicle through a site like www.truckdealersaustralia.com.au/buy/trucks and there might be monthly finance and other associated payments you need to make, which means you need your customers to pay you on time to meet those commitments.

It is wise to remember that turnover figures are just numbers and paper profit until you turn them into something tangible and far more relevant to your business, hard cash.

Sales figures are only truly meaningful when you have managed to collect the money due to you and put that into your business. A primary aim of your business should be to set up an invoicing and collection system that minimizes the number of problems you have collecting receivables.

Too much stock

If you are running a service business you won’t be so greatly troubled by a common problem that causes cash flow problems, which is having too much cash tied up in stock that is just sitting on the shelves.

Any business has to be vigilant and avoid squeezing their cash flow too much by not managing their inventory successfully, but in a small business your margin for error can be reduced and any overstocking issues can severely hamper your cash flow.

Make a conscious effort to keep a close eye on your stock levels and avoid creating an unnecessary cash flow problem because too much of your money is tied up in stock rather than being in your bank account.

Watch your margins

It is not just late-paying customers who could be causing you cash flow problems and weak gross margins are also a common culprit.

If you are consistently finding that your business is starved of cash but a lot of your invoices are being paid on time, there is a chance that you might be struggling because your margins are too thin.

If your prices are too low or your direct costs are prohibitively high, either scenario or a combination of the two could put a serious dent in your cash flow.

It is also important to monitor your overheads and ensure that your material and labor costs, plus your other overheads such as premises costs are not at such a level that you are eating your way through cash as soon as it comes in.

Seasonal issues

Some businesses are seasonal and that means there will be periods throughout the year where sales are booming and cash flow is very positive, followed by quiet periods where things get a lot quieter and the inflow of money slows down.

Be mindful of seasonal sales issues if they apply to your business and make plans to keep enough of your cash that you have accumulated aside so that you don’t run into cash flow problems when a seasonal adjustment slows sales down for a period.

You will often still have the same level of fixed costs each month and that means you have to anticipate your cash flow levels to deal with these demands.

Cash flow is such an essential ingredient to the survival and success of your business and if you encounter cash flow problems at some stage it can be a serious obstacle to your progress.

This is why it always pays to keep a close eye on what your cash flow is doing and take steps to rectify any problems before things get out of hand.

About the author

Charlie Hunt is a business consultant who loves seeing small businesses flourish, and owners get the help and answers they need. As well as offering advice in-person he also shares his tips and knowledge online.

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