Is Your Small Business Facing Cash Flow Problems?
Just like good cash flow keeps a business afloat, various problems can also cause businesses to fail. Know how to manager cash flow with IIFL Finance!
Cash flow is often considered as the lifeblood of a company. A positive cash flow is crucial for making plans and decisions in a business. Sometimes, the amount of cash flow in a business may decrease due to unforeseen circumstances, putting a business at risk.
What Is Cash Flow?
The net amount of cash and cash equivalents moving in and out of a business is known as cash flow. It is different from net income, which is the actual profit or loss that a business makes after deducting all the expenses including some non-cash items from the total revenue.
Typically, cash flow includes the cash generated from operations, investing and financing after deducting the operational expenses.
Cash Inflow And Cash Outflow
The income received into a business through its activities is called cash inflow. Cash outflow is the sum total of the costs incurred in servicing debts, liabilities, operational functionalities and other associated liabilities.
Why Cash Flow Problem Occurs
A number of problems can result in poor cash flows for a company. These include low profits, excess investment, excess credit to customers and seasonal demand.
Underestimating the start-up costs of a business and overlooking the high overhead costs could also result in poor cash flows. Any delay in payments by customers is another factor that often contributes to weak cash flows.
The problem of weak cash flows is more frequently faced by small business owners and self-employed entrepreneurs. Is your business facing any financial instability? How do you know if you have a cash flow problem?
Insufficient Working Capital:
No money means no bill payments. There can be delays in production and delivery due to insufficient working capital, resulting in unsatisfied customers. It may cause legal problems and can even lead to closure of business.
Underestimating The Start-Up Costs:
Business owners must do a proper calculation of the start-up costs. To be on the safe side, they should keep in mind the well-known saying: “Expect everything to take at least twice as long and cost twice as much as you planned”.
Higher figures may be cause of concern for investors and banks. But with realistic calculations, a company’s chances of survival and growth are higher.
Mispricing implies a cash flow problem. Often, entrepreneurs simply total up their costs and keep a margin to decide the pricing of their goods and services. In the process, they undermine the profit.
If a product or service is niche in the market or demand is high, any discrepancy in pricing may lower the profit of the entire product (or service) segment.
Discounts And Promotional Offers:
Regular discounts result in additional costs. Also, too many promotional offers may undermine the value of the brand and product in the minds of the consumers.
Lack of sustainable profit is a clear and definitive indication of cash flow issues.
Late payments can impact business relationships. If a business owner is unable to clear bills of suppliers, contractors and vendors on time, it indicates a lingering cash flow problem.
Insurance, legal fees, taxes, administrative costs, employees’ salaries and perks are some hidden costs which small businesses have to bear on a monthly basis. So, entrepreneurs must be prepared to bear these expenses as ignoring these can be detrimental.
Poor management practices like bookkeeping errors, missing payments, and making mistakes while filing returns point toward possible cash flow problems that may cripple a business.
Managing Cash Flow
Low funds in business means the business may not have enough money to meet its day-to-day operational activities. To keep such problems at bay, business owners and entrepreneurs must consider a few things:
- Stashing a working capital equivalent to at least six months of expenses as backup.
- Cutting down unnecessary expenses to reduce the overhead cost.
- Considering customer responses and online pricing surveys for deciding the best price.
- Raising the price of products, gradually.
- Enforcing late payment penalties and scrapping longer payment terms of defaulters.
- Tracking the profit margin, even if sales are high.
- Practising better cash flow management with online tools and apps.
Businesses with negative cash flow are unable to meet their financial obligations and make better plans for the future. Many a time these businesses require additional funds to avert a crisis or even bankruptcy.
Most banks and financial institutions offer loans to businesses with cash flow problems. For instance, IIFL Finance is a key market player that offers business loans at attractive interest rates for as long as five years.
Moreover, IIFL Finance doesn’t require any collateral for business loans up to a certain limit and also allows small businesses to repay the loan as per their invoicing cycle. So, if you are facing cash-flow problems in your business, you can consider taking on a business loan to tide over the crisis.
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