Cashflow is a crucial aspect of running your business operations. So, what happens when your cashflow is running low?
Let's dive into these 5 most common problems and solutions to avoid running low on cash.
1. Technology Spending
Is your business spending more than it should on unnecessary or un-utilised technological applications? A study by Genpact Research Institute found that nearly 70% spend their expenses on un-utilised applications.
Do plan ahead and set aside a monthly fixed budget for all necessary application subscriptions, so your business won't run in the red zone.
2. Slow-Paying Invoices
How does your Receivables Aging look? Receivables is an indication of the amount outstanding that your customers owe you. A Receivables Aging is the duration in which your customers have yet to be pay from the time of billing these customers.
Let's break the Aging down into 5 standard categories;
ii. >30 days
iii. >60 days
iv. >90 days
v. >120 days
Always prioritise to chase all old debts first, starting from those who owe you for more than 120 days. Alternatively, to ensure that your customers pay you on time, try for example, offering a discount if they make payment within 14 days.
3. Poor Relationships with Suppliers
Prioritising payment to suppliers is also an important factor to the cashflow.
Discuss with your supplier beforehand on the payment terms. Most suppliers do allow up to 30-day to 60-day credit terms, while some have a cash on delivery policy.
Do plan your cash outflow in advance in the form of a weekly or monthly cashflow forecast, to ensure that your suppliers are paid on time.
4. Excess Inventory
For companies that manufacture goods or resell products, excess inventory can also affect cashflow. The amount of stock on hand would depend on the sales volume, sales forecasts, and available cash. Ideally, prioritise the stock on hand for products that have a medium to high sales volume. For slower-moving goods, it would be best to order the minimal quantity required on hand.
5. Insufficient Gross Margins
Insufficient profits will naturally lead to a lack of cash. Businesses in highly competitive industries tend to have constant pricing pressure. This usually results in businesses selling their products or services at a low price that it is barely covering the costs. A possible solution would be to determine the all-inclusive cost of the product, coupled together with a sales markup percentage to gain better control of your profits.
A poor cashflow can definitely impact more than just the financial performance of the business. To ensure that your business stays cashflow positive, project future cashflows based on historical financial data and plan ahead of time.