If you’re a new small business owner, chances are you’ve heard the statistics: half of all small businesses fail within their first five years. While that may be true, you don’t have to be a part of that number. In many cases, poor cash-flow management is one of the main reasons these businesses fail. With that being said, it’s important to recognize when your business is about to face a cash flow crisis. Here are five tell-tale signs:
1. Fast growth
Although growth is good, if you’re growing too fast you may not be able to keep up with the demands and costs on a day-to-day basis. You will need more working capital and inventory which needs to be paid for. Suppliers won’t be nice when they can’t get their money.
2. Bank Balances
Running out of capital to work with is a huge red flag, and indicates your cash flow is in trouble. Even if you’re making a profit, that does not mean you are out of the woods to avoiding a crisis. You need a steady supply of payables to make sure things stay balanced, as operational costs such as salaries, suppliers, rent, equipment, and other items may eat the money that comes in. It’s the simple things such as a late paying customer that can throw everything off.
3. Missed Payment Discounts
Tracking the number of days it takes to pay your suppliers can help you keep track of money in, and money out. Meeting early payment discounts can help you stay profitable. If you see payment days starting to come sooner rather than at a normal pace, it may be a sign that you are lacking the cash needed to support business operations.
4. Slow Collections
If you sell to other businesses, you already know that the gap between paying and getting paid is a huge issue in cash flow. It is important to track collections and stay on top of your customers, as non-paying customers can put you in the poor house sooner rather than later. If it is getting difficult to collect on your account, this will hinder your ability to pay outstanding bills. Having a plan in place that will bill promptly, collect all payments when due, have documentation in place to ensure payment at the beginning of the process, and aggressively following up on overdue invoices is key.
5. Excessive Short-Term Debt
Being prudent in short-term finance options can help you when you need cash. On the flip side, if used the wrong way, it could quickly become a problem. Your business can easily get caught up in paying fees and incurring debt that you cannot handle. Having a financial advisor that can look at your operations and properly advise you is the first step in protecting your business and getting things under control.
Go through your operational revenues to identify any disbursements, when revenues can be collected and develop a workable forecast to determine future cash streams. As your conditions change, this will help to maintain a realistic idea of where you are.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.