3 Cash Flow Problems That Will Kill Your Small Business

Debt Management, Inventory Control & Accounts Receivable

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Is your business on financial life support? As described in Business Finance Makeover, you may need to use financial statement analysis to get a health report on your small business, a health check that may diagnose any or all of these problems with your business finances:

  • Debt management
  • Inventory control
  • Collecting accounts receivables

All three of these common business problems can seriously interfere with your business's cash flow, so let's look at what you can do to cure these ills.

A) Poor debt management.

Before you can successfully cure this problem, you need to know why you're carrying too much debt. Are you relying too much on a line of credit or credit cards to meet business expenses? Some types of debt are much more expensive than others; perhaps taking out a business loan would be a more inexpensive debt management solution if you can't currently achieve the ideal of meeting expenses from revenues.

If existing loans are the root of your debt management problem, you may be able to get a consolidation loan or renegotiate your current loan terms. Or perhaps you have assets that can be sold so you can pay off some or all of your debt.

Before you do anything drastic, you should talk to your accountant and/or a credit counselor and seek advice about what the best debt management solution would be in your case.

If you find yourself in the position of being visited by collection agencies, these two articles offer good advice on how to deal with your creditors and keep your personal credit rating in good shape:

And if you are considering filing for bankruptcy, read How to Avoid Bankruptcy in Canada & Save Your Small Business first; filing a Division I Proposal may be a much better alternative.

B) Poor inventory control.

Inventory can really dam up your cash flow because it ties up your business's cash. Once you’ve piled up your cash in the warehouse, so to speak, you can't use it for anything else. Worse, if it doesn't all get sold, you can end up having to deep discount it or write it off, losing money either way.

Finding the right inventory control balance between how much stock your company needs to meet customer demand and how long it would take suppliers to fill last-minute orders can be tricky, but it is possible. Rosemary Peavler explains How to Analyze your Dead, Slow-Moving, and Productive Inventory so you can tighten up your inventory control. You may also want to read her article How Retail Firms can Increase Their Sales Through Inventory Control.

C) Problems collecting accounts receivable.

Collecting accounts receivable is another part of cash flow management that is vital to your business's health. If collecting your accounts receivable is sluggish there are two main courses of action to improve your cash flow:

1) Take action to speed up payment.

First, invoice promptly. Putting off invoicing gives the customer the impression that you don't care how long it takes to get your money. Second, take measures to encourage prompt payment, such as clearly stating payment due dates and sending overdue notices.

5 Quick Ways to Improve Your Cash Flow gives more details and suggestions to help you get the money you're owed. Use collection services when necessary. Getting the money if you can is always better for your cash flow than a bad debt.

2) Review your credit policies and the credit histories of customers and/or clients.

Managing your customers' credit is an important part of cash flow management. Weed out unprofitable customers, those that cost more to maintain than they add to the bottom line. Flag those who have a history of slow payment. Remember that you do not have to extend credit to anyone. Getting a credit check on a customer before you extend credit is a good idea. If a customer has a history of slow payment, changing the credit terms or even eliminating credit entirely may be necessary.

Keep Your Business Finances Fit

If you’ve worked through all the exercises on these two pages, your business finances have gotten a good workout and you're now in an excellent position to improve your cash flow, increase your profits and implement your business plans. However, like any new fitness regime, the trick is to keep doing it. In this case, that means actively managing your business finances by continuing to use your business budget and analyzing your financial statements regularly so you can make adjustments when and if necessary.

Looking for more of the Small Business Makeover?

  • The Customer Service Makeover - Learn how to provide good customer service, the kind of customer service that builds customer loyalty, gives positive word-of-mouth advertising, and increases sales.
  • Information Technology Makeover - Learn how to secure and manage your business data, manage customer contacts, set up a document management system and prepare an Information Technology maintenance and crisis plan in this Information Technology Makeover.