10 Common Cash Flow Issues to Avoid
If you know the most common cash flow problems that entangle profitable companies at varying stages, you can avoid cash shortages to pay your vendors on time and operate your business. Here are the most frequent issues that choke businesses at different stages of growth.
Cash Flow Problems for Start-ups
When your business is new, you tend to be vigilant against self-sabotaging cash-flow problems. Still, cash can slip through in the following ways:
- Mistaking cash flow for EBITDA: Earnings before interest, taxes, depreciation, and amortization (EBITDA) doesn’t account for cash movement that comes from loan interest, taxes, equipment upkeep, or investment income. If you want a quick-but-flimsy snapshot of your liquidity management, calculate your EBITDA. For a more reliable, accurate portrait of your company’s financial trajectory, create a cash-flow analysis.
- DIY cash flow tracking: Founders and entrepreneurs bootstrap almost everything. Don’t assume you (or perhaps your office manager) can handle your corporate finances. Outsource this task. Every business needs an expert to comprehensively evaluate their financial health and identify opportunities and risks.
- Spending too much on growth: Entrepreneurs are innovators who enjoy creating new products and starting new verticals that require a heavy investment in R&D. Conversions, sign-ups, and sales are exhilarating. Building relationships with new segments, stealing market share, and creating a buzz in your industry is exciting. You support that growth by hiring eager new faces, incentivizing frontline employees, upgrading software, and making PR appearances. These activities can heighten the temptation to accelerate even more, but everything done in “growth mode” increases your usual marketing spend. The slow return on your growth investment can quickly sap your cash and even threaten the profitability you worked so hard to achieve.
Outsourced accounting services from Ignite Spot can help you identify blind spots that may lead to one of the above pitfalls. With an outside expert, you get an ongoing, accurate assessment of your cash position. You also receive guidance on how to interpret your financial statements and make decisions to build up your cash.
Cash Flow Problems for Businesses Scaling
As your business begins to scale, you face new and unexpected opportunities. With those opportunities come more cash-flow traps. But if you know what to look for, then you can avoid the hazards.
4. Allowing slow collection of accounts receivable: Maybe you were too eager to sign on a new customer and allowed longer payment terms. Maybe your accounts-receivable person is wearing many other hats. Whatever your reason for allowing receivables to linger, your own business cash flow can suffer as a result.
5. Keeping inventory longer than necessary: You already know that stagnant, stocked product costs you in storage. Too often, managers ignore the quiet strain until the dead stock leads to cash-flow problems. Don’t get to that point. Look at your inventory holding costs with the same supercritical eye you give other line items.
6. “Set it and forget it '' overhead costs: In the early days of your partnerships with vendors, and service providers, your uncompromising negotiations scored you great rates and terms. Now that your business has evolved, you hold even more bargaining power. Failing to negotiate with suppliers to lower your cost of goods sold is a common cause of cash-flow issues at this stage — even for profitable businesses.
7. Failing to forecast revenue: Predicting your sales based on consumer trends or seasonality can prepare you for the fluctuations in monthly revenue. Those who don’t are in perpetual “reaction” mode, which costs unnecessary capital. Learn more on how to forecast revenue.
As you read through these snares, you may consider hiring help. Before you do, check out the outsourced accounting team at Ignite Spot. Finding, vetting, and onboarding an in-house accounting team takes precious time (and risk).
Nip the preceding problems in the bud, before they scale alongside your profitable business. Quote your own bookkeeping services or outsourced accounting services now to do exactly that.
Cash-flow problems for enterprise businesses
A well-established, profitable business can still find itself in need of cash. Here’s how:
8. Poor people management: Smaller teams and scrappy start-ups don’t face payroll bloat as much as their big competitors. Payroll and benefits are the number one cash-flow stressor for many businesses. If you’re not actively educating your people on the importance of their performance and creativity in moving the company forward, then your most valuable asset can quickly become a deadweight.
9. Longer sales cycle: Start-up expert David Skok calculates that for every step on the sales complication continuum, the cost of customer acquisition increases around 10x. This eats directly into your cash flow.
10. Too much in cash holdings: Yes, liquidity is one part of a well-rounded, healthy financial picture. Holding on to excessive cash, however, can have an equal and opposite result, such as the following:
• Opportunity cost: Excess funds should be put back to work for your business.
• Perception problems from investors and shareholders: A frozen surplus can arouse suspicion and mistrust.
• Lax management: It’s human nature to see a safety net as permission to ease off the gas because the immediate pressure and urgency is — apparently — gone.
The good news is that financial executives can see these storms gathering long before they put your business in a cash-flow choke hold. A free 30-minute consultation can show you how a remote CFO can help avoid frustrating slowdowns.