Your cash flow is an important part of the financial management of your business. With enough financial backing, a business can survive making losses for a short period of time, but should your cash flow be improperly managed, then you’ll soon experience challenges that could make your business’ operations unsustainable.
Here are five ways that poor cash flow can damage your business.
- You can’t pay suppliers
If you don’t have the cash coming into your business, then you might not be able to pay your suppliers. This can harm your relationship with suppliers which makes you less of a priority, meaning, therefore, that the service you receive is poorer.
In addition, supplies coming to you could be late, and this can lengthen your business’ ability to function. Imagine trying to run a lunch without the necessary ingredients to make your best dish, or running a fashion store with no clothes in it! This can damage your reputation with customers and threaten your revenue as customers abandon you for more reliable sellers.
- Reduce credit score
Many businesses rely on their good credit score. However, if you can’t make repayments or you make them late, your credit rating will be lower and this can negatively impact your ability to borrow money for business growth.
When you start missing payments, lenders may raise rates on your borrowing. If you continue to miss payments, you could face insolvency and the end of your business. You might also have to raise prices and, in some price-sensitive sectors, such as retail and hospitality, this can turn customers away.
- Can’t invest in inventory
If you can’t buy new inventory, then your business can literally come to a standstill. This can be particularly challenging if you have a new product line being launched but can’t buy enough stock. Customers are more likely to go to stores that have the best stock levels.
Some inventory loss might also make it challenging to manage your cash flow. Imagine trying to host events if you don’t have the right tables, chairs, plates, etc. because in the last job they were damaged.
- Can’t pay staff
Not being able to pay staff is a headache no business owner wants, but it’s a real danger. The biggest threat here is that key members of your staff, the very ones that are able to save your organisation, will look for new work and leave. With many retail jobs available for experienced employees, this is a real concern.
Being unable to pay staff can also pose a major challenge to your reputation. If rumours of staff being unpaid circulate, then you won’t be able to attract new staff, creditors will become anxious, and customers will not be supportive.
- Lose customers
When you have bad cash flow, you’re suffering from a major problem. When debts, suppliers and employees aren’t being paid, you’re going to get negative press. This can directly lead to your business losing customers as they avoid you, scared that you won’t be able to fulfil bookings or that they won’t be able to return items should you close down.
Longevity is important to customers. If they think you won’t be there in a few months time, they’ll leave.
The available solutions
Luckily there are solutions to your poor cash flow problems that can help your business not only survive but also thrive in the aftermath. Here are some options for your business.
- Check customer details
In retail this isn’t much of a problem; customers pay when they select their purchases. However, for some hotels and event companies, one of the biggest challenges you’ll face with cash flow is your customers not paying on time. Imagine a customer staying at your hotel and then leaving the next morning before paying.
Therefore, the first thing you should do with any new customers is to check their details. Ensure they have given correct information before you allow them to use your services. You can also request that they pay a deposit before you start offering them your services.
- Define payment terms up front
Develop a payment schedule with your suppliers that ensures you don’t get surprised by an invoice. Ensure that your suppliers know and commit to their obligations as well. Ensure you write in the document what the potential ramifications are should they not meet the terms of the contract.
Payment terms can be generalised for all your suppliers but it is likely they will all have different requirements.
- Outsource your financial management
Sometimes bad cash flow is caused by your inability to manage your finances as well as you should. You’re probably not an expert in business financial management and why should you be? However, there are others who are more experienced and they can take over the day-to-day running of your finances.
When you outsource financial aspects of your business you free up your time to concentrate on doing what you do best: serving your customers. Therefore, you are more productive and this can help raise revenue, increase profits and improve your cash flow immediately.