Feeling Flush? Or Flushed? - Cashflow is Key for Business Survival

Building Indiana Business

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In these times of widespread concerns about inflation, one of the most important things business leaders can do is carefully maintain their cashflow stability. But did you know this is a key area where many businesses struggle? According to reporting from QuickBooks, as many as two out of three business owners regularly struggle with cashflow issues. About a third of these firms are unable to make necessary payments because they don’t have enough funds.

Let’s take a dive into why this is such a prevalent problem and what types of things can be done to prevent it from happening.

Two out of three business owners (61%) regularly struggle with cash flow issues. (Source: Quickbooks, Feb. 2019).

Why is Cashflow Such a Struggle?

Poor cashflow can be caused by an array of different factors, often more than one. But there are several common threads that can be found when examining the reasons behind reduced revenue. Some of the most typical reasons include:

Zero Reserves. With so many companies operating on thin budgets, any disruptions to inbound revenue can quickly become a catastrophic problem. Most businesses (about 9 out of 10) would need to take action if they experienced a two-month revenue loss, according to the Federal Reserve. That’s why experts recommend conducting a long-term cash forecast and building up a six-month stockpile to cover expenses in the event of unexpected drops in revenue.

Late Payments and IOUs. More than 9 out of 10 businesses experience late payments from their customers, according to Atradius, a company that specializes in debt collection. It is estimated that at 90 days overdue, these late payments could be worth only 20% of their original value. When companies don’t get paid for their hard work, it can have a massive impact on cashflow for day-to-day operations. Payment terms must be updated to prevent this from happening.

Running in the Dark. Another huge issue that negatively affects cashflow is the fact that many business owners do not have a complete understanding of their full spending. This tends to get compounded when companies experience periods of rapid growth, because complexity can add to confusion. QuickBooks estimates as many as 6 in 10 business owners do not know how much they spend each month, nor do they fully understand how much inbound revenue is deposited into their accounts.

How to Protect Your Company’s Cashflow

Given the economic picture that every company is facing as we enter 2023, now is the time to implement strategies to preserve cashflow integrity during any situation that might arise. Several important steps to consider include:

Contingency Planning and Awareness. First, before any crisis planning can be drafted, business owners really need to become completely informed about their monthly inbound and outbound cash. That knowledge will be a powerful resource for building effective contingency plans for periods of low cashflow. As you build your plans, focus on areas that can be suspended or scaled down as needed. Evaluate how these spending reductions might impact your operations. Some of the areas where experts recommend making cuts include subscriptions, outsourced services, and potentially any rented items or facilities that might be forgone.

Tighten Accounts Receivable. Reviewing and updating your company’s customer payment policies is highly recommended to tighten the gaps in outstanding receivables. Some of the most common suggestions in this area involve requiring upfront deposits on larger projects or work, and also implementing discount policies for customers that pay their invoices in an earlier timeframe. Internally, your company could also send invoices earlier, accelerate your billing cycles, and expand your accepted payment methods. Some companies also look to third-party entities to purchase their old outstanding debt through invoice factoring.

Review and Monitor Supply Chains. Supply chain volitivity is one area that could become expensive quickly, damaging your company’s cashflow as prices fluctuate. There’s also a silver lining though, in that opportunities for savings or alternative options might be discovered upon closer examination. One of the best ways to make sure your business is protected from disruptive supply chain costs is to broaden your network across a diverse body of vendors, shippers, and suppliers. Always be on the lookout for new options, because your supply chain strength might very well be the lynchpin that keeps your cashflow in the black.

Hold on to Your Wallets

Keep your company flush with cash, and not flushed down the drain. There’s little doubt that inflation and economic uncertainty lie ahead for all of us this year. Making sure that your company’s cashflow stays solvent will be an essential step to keep your company safe from whatever scenarios may come. Get yourself fully informed about your monthly inbound and outbound cash and start your planning today. It just might be the most valuable financial decision for 2023.

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Building Indiana Business magazine is the largest business-to-business publication in the state of Indiana.

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