8 Ways Businesses Hurt Their Cash Flow — And What To Do About Them (Copy)
If you’re a business owner, then you probably don’t need to be reminded of the importance of maintaining healthy cash flow. For many owners, ensuring that there’s enough money in the bank to pay the bills is an ongoing battle.
If you’re facing cash flow troubles, then you’re not alone. It affects a big percentage of businesses — some 88% of small businesses, according to the U.S. Chamber of Commerce — and even seemingly successful businesses can be affected.
While cash flow challenges can be bad news, there are strategies that can help to improve the situation. In many cases, even tightening up some of the common cash flow errors that businesses make can make a huge difference. In this post, we’ll run through some of the most common ways businesses hurt their own cash flow, as well as outline some handy ways to overcome them.
They Hold Excess Inventory
Some businesses are cash-poor but inventory-rich. They’ve got a whole warehouse full of goods, yet don’t have money in the bank to pay their bills. While it can sometimes be tempting to buy excess inventory (especially if there are bulk order discounts), it can have the unintended consequence of tying up money that would be better used elsewhere.
There are two ways to manage this. If you already have excess inventory, then liquidate it. A flash sale can be a good way to bring in some money and free up warehouse space. The second strategy is to get smart about inventory forecasting, which should help to prevent the problem from happening again.
They Delay Sending Invoices and Have Generous Payment Terms
Your business can’t get paid until you send an invoice. Alas, amidst a sea of obligations, it’s easy to overlook sending an invoice.
Improving your invoice processes can go a long way towards improving your cash flow. After all, the sooner you send it, the sooner they’ll pay. It’s that simple — well, it’s nearly that simple. If you have overly generous payment terms, such as allowing a full ninety days for payment with no penalty for late payment, then you’ll be running the risk that your clients put it to the back of their to-do list. In addition to having shorter payment terms, you can also consider offering a small discount for early payments.
They Write Off Unpaid Invoices
Try as you might, if you’re in business long enough, then eventually you’ll encounter a client who fails to pay their invoice on time. That can be frustrating, not just because it can impact your cash flow, but also because it takes up your time and energy. Nobody wants to spend their time chasing a non-paying customer.
When that happens, some businesses choose to write off the invoice since chasing payment is taking up too much energy, but that’s a mistake. After all, there are ways to get clients to pay up, and, in many cases, you don’t have to do anything. By working with a reliable b2b debt collection agency, you can ensure that the money you’re owed is still being pursued even though you’re focusing your time and energy on other tasks. You’ll simply be able to carry on with the running of your business, secure in the knowledge that the money you’re owed is being fought for.
They Buy Expensive Equipment (rent instead)
For some businesses, it’s just a fact that they need expensive machinery in order to work well. However, there are different ways to acquire that equipment, and the one that they choose may impact their cash flow situation.
Buying expensive equipment can be damaging to cash flow since, even if it’s bought on finance, it usually requires a significant upfront payment. On the other hand, leasing equipment can prove to be much more manageable. You won’t get the advantage of owning the equipment, so you can’t class it as an asset, but many businesses will find that it’s a better option.
They’re Scared to Raise Prices
Of all the ways to improve cash flow, raising prices is one of the better ones, yet it’s also one of the most underutilized. Many businesses are afraid to raise their prices because they believe that it might cause them to lose customers, but that’s not always true — in fact, it’s hardly ever true, provided you do it correctly. Massive price hikes with no explanation can cause customers to look elsewhere, but mild increases that are explained? They’re normally well tolerated by clients.
They Don’t Perform Customer Credit Checks
You’d like to think that everyone who interacts with your business would do so with honest intentions. But the fact is that there are some customers who simply have no intention of paying.
As you can imagine, it’s much better to know that before you provide them with goods and services. One effective way to do this is to perform a background check. This can help reveal whether they have a track record of paying their bills. If they don’t, then you’ll know that they’re worth working with or that you should ask for advance payment (or a large deposit) first. Even if you don’t perform a full credit check, even a quick Google search might turn up something that it’s better to know before taking them on as a customer.
They Stick With One Supplier
Having a good relationship with your suppliers is nice, but if it’s damaging your cash flow, then it can be worthwhile looking elsewhere. If you haven’t looked at suppliers in a while, then you might find that there’s a cheaper, better option available. Just like that, you might have saved yourself some money without experiencing any downsides.
They Pay Their Bills Immediately
Finally, it’s worth looking at how you manage your own bills that you have to pay. Many businesses pay their invoices immediately, even though they don’t necessarily have to. If you have thirty days to pay the invoice, then there’s little value in paying it on day one if there’s a chance it might cause cash flow problems.
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