Is your small business in danger of these cash flow crunches?

10th August, 2015

My personal trainer tells me that crunches are great for my abs — as the saying goes, no pain, no gain — but crunches in business can be debilitating, particularly cash flow crunches.

Many profitable businesses still end up in trouble because they run out of cash. So how can you avoid this happening in your business? There are usually warning signs that your business could be headed for trouble. Here are the most common warning signs and tips on how to avoid the cash flow crunch.

Slow paying customers

This is a bugbear of many businesses. If you provide credit to your customers, you put the ball in their court for payment. So how do you make sure they pay on time?

There are a number of ways to encourage prompt payment, including:

  • agreeing on payment terms in writing before you transact with a new customer
  • providing payment options to make payment easier
  • ensuring all outstanding debts are followed up regularly — the squeaky wheel gets the most oil
  • having processes in place for quick resolution of customer disputes that hold up payment.

Don’t be hesitant to “sack” a customer that regularly pays late. This will allow you to put more energy and time into those customers that respect you and your business.

Aged or excess stock

Holding too much stock is like piling up cash in the storeroom. Cash tied up in stock that is not selling can be become a cash flow nightmare.

If you have old stock or too much stock, then you need to take action. Move this stock any way you can, including donating some to a worthwhile charity — which can be used as a marketing strategy by advertising your donations. Holding stock can cost up to 30 percent of the cost of stock — think about the storage and insurance costs associated with holding non-moving stock.

Once you have moved the stock, you will have more room and cash to buy stock that your customers really want.

No allowance for BAS returns

Many small businesses get themselves into a pickle at BAS time. You have collected the GST, and now you need to pay the ATO this GST — but you don’t have enough cash!

Adopt a proper procedure to ensure you don’t get your business into this situation. Have a separate bank account where you can deposit the GST component of your sales regularly (weekly or when you collect your sales income), and when BAS time comes around you won’t be scraping up cash to pay the ATO.

Not having access to finance

One of my favourite sayings is “Don’t go to the bank for money when you need it.” If your business does experience a cash flow crunch, you need to have a back-up plan. Having a finance facility in place, such as an overdraft or other short term financing, will ensure you can trade your way through any cash flow problems quickly and get your business back on track.

Cash flow is the lifeblood of every business, so make sure you keep the cash flowing!