Managing cash flow is one of the most critical aspects of running a successful business. Unfortunately, it’s a challenge many entrepreneurs and small business owners gloss over when developing their business plan. By focusing entirely on revenue generation, they lose sight of the fact that it often takes days, weeks and even months to get paid for a product or service you’ve already delivered.
Yes, it can take months for you to get paid.
In fact, accountants have a formula for calculating how much time it takes to receive what you’re owed. It’s called days sales outstanding, or DSO for short. Industry research shows that a DSO under 45 is considered low.
Imagine that: converting your receivables into cash 45 days later is considered quick turnaround time!
While 45-day DSO windows may be no issue for large corporations, it can cripple small business owners. In what follows, we look at six common cash flow problems and how to resolve them. These steps will show you how to reduce costs and speed up the collections process.
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1. Slow-paying invoices
As our discussion on DSO clearly illustrated, it can take a long time to get paid for a product or service you already delivered. Unfortunately, small business owners have to offer longer payment terms to clients in order to stay competitive. The longer it takes to get paid, the more difficult it will be to manage cash flow and stay up to speed on your day-to-day operations.
One solution is to provide your customers with an incentive to pay faster. This can include a small discount for a quicker payment or the promise of a future discount.
Another practical solution is to automate your accounts receivable so that you can streamline your collection process. To learn how, read: Small Business Solutions: How to Ensure Your Business Gets Paid on Time.
2. Disorganized books
Entrepreneurs and small business owners are great at what they do, but this doesn’t always translate into general office administration. Disorganized books can lead to a lot of troubles down the road, including keeping track of your invoices. After all, it’s a lot harder to cash invoices if you don’t know what you’re owed.
The only way to overcome this challenge is to use an accounting system that can do most of the work for you. Luckily, we live in the age of automation, which means there are plenty of solutions that can take the grunt work out of accounting. To learn more, check out: Ten Ways to Automate Your Small Business for Maximum Efficiency.
3. High expenses
Cash flow problems aren’t just about what’s coming in, but what’s going out as well. Overhead expenses refer to the costs of running a business that aren’t directly related to the product or service you are selling. While overhead expenses may be necessary, they can quickly run out of hand if you don’t take measured steps to control them.
Cutting expenses is a simple solution but isn’t always easy to implement. If you’re struggling with cash flow, you have little choice but to audit your expenses and start making cuts where necessary. Another way to control costs is to scale up your business slowly (more on that later).
4. Bad debts
Businesses can incur debt in any number of ways. One way is by selling a product or service to a client that never actually pays. This is called bad debt, and can have a major impact on cash flow.
Business debts through cash advances and credit cards can also present a problem, especially when your payments are out of sync. Although financing can be a powerful tool for growing your business and covering expenses, it must be used responsibly.
To ensure you don’t run into an issue of bad debt, you may want to conduct commercial credit checks on your client or adopt a system where you receive up front payments for any service you offer. Of course, this all depends on your specific industry.
5. Profit problems
Another obvious cause of cash flow issues is an unprofitable business. Naturally, if you lack profit, you will also lack sufficient cash to run your business. Although it may be possible to sustain losses initially, no business can sustain this cycle indefinitely.
If your business isn’t profitable, you need to assess the root cause and resolve it immediately. This strategy may include a combination of reducing prices, boosting sales and lowering overall expenses.
6. Expanding too quickly
Business owners often can’t resist the urge to expand their operations, especially after initial success. Although scaling up your business is necessary to ensure future growth, doing so too quickly can put a squeeze on your cash flow. By growing too quickly, a business incurs bigger expenses than its invoices can justify at this stage.
Working with a broker or financial services company can help you determine the pace and timing of your expansion efforts. They can also provide you with financing solutions that satisfy the need to expand your business without biting off more than you can chew.
Red Door Capital helps small businesses develop a concrete plan to grow and prosper over time. We offer funding solutions that can help you transform a small business into a larger one. Check out our growth and expansion solutions to learn more.
Managing cash flow can be a complex challenge for small businesses, especially those with long-term growth ambitions. Businesses that work in the services industry can face even bigger challenges converting receivables into cash due to the nature of their payment cycles.
Regardless of your business, Red Door Capital can help you manage your cash flow successfully. We’ve worked with businesses of all types to ensure their continued liquidity at each stage of their growth and development.
Contact us today to learn about our cash flow solutions.
Commercial Capital LLC. Cash Flow Problems and Solutions.
Freshbooks (February 25, 2016). “6 Ways to Avoid Cash Flow Problems in Your Business.”
Investopedia. Days Sales Outstanding – DSO.