Approximately 12% of small businesses close each year, but it’s not because of a lack of customers. The number one reason small businesses fail is cash flow. The good news is—there’s something you can do about that. Let’s dive into some of the most likely causes of small business cash flow problems plus some tips for dealing with them before it’s too late.
You may have the most profitable small business in town, but you can still face cash flow problems. That’s because profits have little to do with your ability to pay your bills. But, if your profit margins are low, your gross margins will also suffer. This can have a knock on effect on cash flow, especially if you don’t do anything about it and the bills start coming in.
To help tackle the problem of low-profit margins, it’s useful to do a cost of goods sold (COGS) analysis. This will help you better gauge how to price your products profitability and tell you which product lines to ditch. Read Understanding COGS: Save Money on Taxes and Improve Profits to learn more.
If your overhead expenses are high, you’ll quickly erode the volume of cash in your business. These can include vehicle costs, commercial leases, office equipment, IT, and so on.
Make a point of reviewing these expenses regularly and look for ways to minimize or eliminate unnecessary costs. For tips on eliminating wasteful practices, read How to be a Lean, Yet High Growth Small Business.
A High Tax Bill
If you’re feeling the pinch each month, even though your margins are good and expenses are under control, you might want to have a chat with your tax advisor. First, to make sure you’re maximizing your allowable deductions and tax credits and second you might want to discuss your business structure.
For example, if you operate as a sole proprietor, you may be able to reduce your taxable income by forming an S-Corporation. It’s not for everyone and carries some administrative responsibility, but it could help reduce the higher income and self-employment taxes that you pay.
This short video from Blumer CPAs offers a quick and easy side-by-side demonstration of how you can save money by moving from a sole proprietor to an S Corporation.
Net 30+ Day Invoice Terms
Most businesses operate a 15-30 net invoice policy, but we all know that’s not always the case. Some customers simply don’t pay on time while others, particularly larger enterprise clients, insist on 60 or even 90-day payment cycles. This can really complicate small business cash flow.
So what can you do?
Improving your collections process, offering incentives for early-paying clients, receiving payments electronically, can all help speed up the payment process. Another tactic is to negotiate milestone payments upfront, meaning you invoice as you complete certain steps in a project, rather than waiting until it’s complete (which could take forever if scope creep comes into play).
Another option is only to agree to net 30+ day terms if your client has good credit.
If you need an immediate remedy, consider cash flow loan services like those offered by Fundbox. Fundbox is an award-winning service that offers business owners a simple way to fix their cash flow by advancing payments for their outstanding invoices. Check out Fundbox reviews to learn more.
Tying up cash in stock that you can’t shift is a cash flow killer. Sales and discounts are a good way to shift stock (if your margins can tolerate it), but try and keep your warehouse leanly stocked so that you can meet demand, and no more.
If a line turns out to be popular, let your customers know that you’ll contact them when the item is back in stock (also a great way to get their contact details for future marketing), and give them a little something extra for their patience (if you can afford it). Alternatively, don’t purchase inventory until you have a confirmed order from a customer.
Apps can also help you keep an eye on inventory movements and their impact on cash flow, Inventory Now, for example, tracks inventory lifecycle (including units bought, shifted, shipped, buy price and profit).
- SBA.gov. “Frequently Asked Questions“