Talk to any business owner about their number one financial issue and they will likely answer “getting a handle on my cash flow.”
The definition of cash flow in business is the money that comes into and that goes out of a company. A cash flow deficit occurs when more money flows out of a business than flows in. Cash flow is typically measured monthly, quarterly or annually. Businesses can get into a cash flow deficit in a number of ways, including the following:
Many business owners are so busy focusing their efforts on producing their product or service, marketing it and running the operations that they don’t put enough time into the businesses’ accounting.
Relaxed Credit Terms with Customers
After working so hard to get a customer to order their services or products, it is often difficult for business owners to set a firm due date for payment. Since businesses suppliers do have a firm due date, paying them before a customer makes a payment, can result in a deficit cash flow.
Every business occasionally encounters a customer that won’t pay his or her bills. However, if your business does not have a good credit check and control system in place, you may discover too late that many of your customers have poor credit histories. Without collecting the money owed for services or products rendered, a cash flow deficit is sure to ensue.
Uncontrolled Growth or Expansion
Every business wants to grow and expand. Sometimes business expansion plans can become grandiose and eat up the business’s cash flow resulting in an unanticipated cash flow deficit.
Business is not Making a Profit
A business that is not making a profit either has a poorly priced product or service, out of control expenditures, uncontrolled expansion into new areas or products, or other reasons impacted by internal or external factors. A business cannot operate at a loss indefinitely, eventually your sources of cash and credit will run out.
The best way to avoid a cash flow deficit is by incorporating a strategic budgeting process into your company’s systems. By recognizing the importance of strategic planning, you can better structure your business decisions and help avoid a cash flow deficit altogether.
To help with your strategic budgeting process, we have included 5 business budget planning tips to reduce your cash flow deficit.
- Develop an accounting system and keep it up to date.
- Negotiate the credit/payment terms with your customers when you sign them up for services or products. The standard is payment within 15 to 30 days of product or service delivery.
- Institute a credit system to check a customer’s credit before delivering a product or service. Ask for an upfront deposit with the balance due at delivery for clients with poor credit histories.
- If your business is not making a profit, you need to investigate the cause and rectify it.
- Get in the habit of forecasting your cash flow to be better prepared for months where you may run a cash flow deficit.
As a business owner, you have to wear a lot of hats and it is not always prudent or feasible for you to manage every aspect hands-on. You may want to consider hiring an accounting service that can help business owners like you keep control of your finances, be more productive, reduce risks and allow you to make the most of your business.
Are you looking to identify areas in your business that is negatively affecting your profitability and to develop practical solutions to fix them? Get in touch and let us help you focus on what you do best, while we handle the rest.