Having access to cash is crucial if you want to succeed as a small business owner. If you can’t pay for business essentials, your business can’t grow.
Understanding how to perform a cash flow analysis to manage and improve your cash flow needs to be a top priority. The following are common cash flow problems small business owners face, along with tips you can apply to guard against them.
You need to ensure your customers are paying invoices on time. Unfortunately, many small business owners struggle with this. Customers often delay when they receive invoices.
That doesn’t need to happen to you. When agreeing to contracts, make sure you clearly state invoice payment terms. Additionally, give your customers a reason to pay on time by adding interest fees for late payments.
Profits help your company grow. However, you need to remember that growth is expensive. Yes, high profits can help you justify hiring more employees or renting more office space, but if you don’t manage your finances properly, you could squander the money you’re making.
Avoid this by making sure you carefully monitor your revenue and spending. You also need to constantly look for new ways to boost profits. For example, instead of investing the money you’ve earned into unnecessary equipment, you could use it to develop new products and services.
You probably can’t grow a thriving business solely with your own funds. You’ll need loans or investments from others to ensure consistent growth.
That said, banks and investors may withhold loans if your business isn’t performing according to their expectations. To ensure this potential issue doesn’t affect your cash flow, don’t ask for the bare minimum when seeking loans and investments. Instead, ask for 25% more than what you expect to need. This gives you some extra flexibility if your business takes longer to become profitable than you expected.
Undervaluing Your Products and Services
It’s tempting to set your prices low when offering products and services. It’s understandable to assume you’ll attract customers more easily if you make your services affordable.
However, pricing your services according to their actual value will help you boost their perceived value. Thus, you’ll avoid cash flow problems resulting from undervaluing what you offer.
Taking Too Much Time to Complete Projects
Knowing how much time it will take to complete a project is essential as a business owner. For example, perhaps you run an app development company. Your contracts may typically allow clients to withhold payments until you deliver completed apps. So, until a project is finished, you won’t be paid for it.
You need to understand how long a project will take. If developing an app took much longer than expected, you may not have enough cash to keep working on it.
Make sure this doesn’t happen by carefully reviewing your past work to ensure you thoroughly understand how much time you’ll need to spend on a given project. Additionally, you can adjust your contracts to include more milestones, allowing you to receive payment on a more consistent basis.
Regardless of your industry, these are important tips all business owners should keep in mind. Remember, cash is crucial. Applying these tips will ensure you always have enough.
About the Author
Rae Steinbach is a freelance editor for Funding Circle.