Cash Flow or Sink: How to Know If Your Business is Heading for a Cash Flow Crisis
We understand that as a small business owner, you’ve got so many things on your plate. Managing cash flow on top of everything else can feel a bit daunting! However, if you can recognize five key signs that your business is heading for a cash flow crisis, you can quickly implement corrective action, which may include applying for small business financing, to right the course for your company.
Here are a few warning signs of potential cash flow issues:
1. Your Customers Don’t Pay On Time
No question, customers are a necessity and key for any business’s success. It’s essential for you to have a good relationship with your customers, but unfortunately, late-paying customers can impair your cash flow, as well as your growth.
It’s not unusual for small businesses to have late-paying customers. That’s why you need to set firm deadlines to help maintain your cash flow. You might also consider incentives to get customers to pay you promptly by offering rewards for early payment. In addition, you can use booking keeping and invoicing software, like Freshbooks, to send auto-reminders to your customers about upcoming payments.
2. You Have Too Much Inventory
Inventory is an asset, but when you have too much, it can become a liability. You should have enough inventory to meet your demands, but not so much that it negatively impacts your cash flow. Too much inventory takes up space and is inefficient. The more money you have tied up in inventory, the less you have for other expenses. That’s why it’s best to practice lean inventory management, like getting rid of products your customers aren’t buying to improve your cash flow.
3. Your Margins Are Slim
Of course, healthy margins are critical to cash flow. It’s important for any business to adjust your pricing to ensure your margins can sustain your business. By figuring out your profit margins, you can better evaluate how your business can grow.
Healthy profit margins can vary by industry. To determine what’s right for your business, it’s helpful to compare your margins against competitors. The NYU Stern School of Business offers a helpful guide with a margin list organized by industry that you can use as a comparison.
4. You Don’t Have Enough Reserves for a Rainy Day
According to InsuranceQuotes.com, 82 percent of small businesses fail due to cash flow problems. These businesses don’t have enough reserves for a rainy day, so they’re unable to weather unexpected storms like slow sales seasons, hefty tax payments, or equipment repairs. Many small business financial experts recommend having at least three to six months of operations expenses reserved. However, we recommend developing a cash flow plan for 12-15 months based on your company’s burn rate, financial forecasts, and the stage of your business.
5. Your Sales Pipeline is Drying Up
It’s a small business’s worst nightmare; deals and leads that once looked promising have vanished. What do you do when your sales pipeline dries up? We know it’s an incredibly trying experience, but it happens at times to even the most successful businesses. If you find your sales pipeline running dry, you can try these:
- Find new leads from services like Salesripe.com
- Train your sales team on advanced prospecting tactics
- Increase marketing and implement promotional offers
- Implement an automated referral program with tools like Viral-loops.com or ReferralCandy.com
There’s an ebb and flow to business sales, but using the above tactics and being proactive can help improves sales to prevent your sales pipelines from running dry.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.