Stressed Man

5 Frequent Causes of Cash Flow Issues for Small Businesses

Starting a new small business can be incredibly exciting. However, the odds aren’t in your favour. According to the Australian Treasury, 70% of new small companies had failed or not started operating as intended after three years. Whether your business is new or has been around for a while, successful execution is an ongoing process that must ride with the waves of the economy and consumer preferences. Recent events, leading to Australia’s first recession in 29 years, have made this fact more evident for most of us than ever before. Of all the difficulties facing small business, cash flow problems are the most pronounced. ASIC reports that poor cash flow is a leading factor in over 40% of business failures in Australia.

Slow paying debtors have always been an issue for small businesses. However, the current economic downturn has exacerbated the problem. Many large firms are using their bargaining power to delay payments to smaller businesses while they face growing pressure on their supply chain as well as declines in demand for their products and services. The result is $115 billion in late payments to small businesses every year – denying SME’s more than $7 billion in working capital annually. Almost every small business will encounter a cash flow challenge at some point or another. Knowing how to identify the leading causes will put you in the best position to deal with them proactively and effectively. Here are five of the most frequent causes of cash flow problems for small businesses in Australia. 

Pressure on Sales or Gross Profit Margin

Changes in your top line can have a disproportionate impact on your cash flow in the short to medium term. Just as a bumper period may result in an influx of cash, a sudden downturn can put severe pressure on your cash flow. A drop in sales can be caused by many factors, such as an increase in competition, consumers shifting away from your industry’s products and services or instances of general economic malaise, such as what we are currently experiencing. While sales can vary dramatically, most businesses have relatively fixed overheads, such as permanent employees or commercial rent. These bills still need to be paid regardless of your current level of sales, leading to cash flow difficulties.

“Every business should regularly review their pricing structure to make sure it’s sufficiently profitable”

Similarly, a reduction in your gross profit margin can have a detrimental effect on your cash flow. Even if your sales are increasing, a disproportionate increase in your cost of goods sold or services rendered may result in a hit to your profitability and cash flow. Every business should regularly review their pricing structure to make sure it’s sufficiently profitable while maintaining competitiveness in the market.

Regular Late-paying Customers

One of the most common causes of cash flow problems for small and medium businesses is the dreaded late-paying customer. You issue your invoice as soon as possible with 30-day payment terms, only you have your customer pay you after it turns 15 days overdue and they’ve had missed calls from your accounts receivable department. NAB’s research found that 53% of invoices are not being paid on time. It isn’t easy to make financial decisions when the majority of your expected incoming cash flow isn’t received when expected. Here are some tips to help you chase late-paying customers without ruining your relationship with them.

Unsatisfactory Inventory Management

If you’re a business that sells physical goods to your customers, you’ll understand the importance of managing your stock levels. Any additional stock you carry above what is absolutely necessary to meet customer demand means cash is tied up in unsold inventory. To compound the issue, unsold inventory will drop in value over time as new products are released. 

There is a delicate balance between maintaining a sufficient stock buffer and going overboard. Nonetheless, a well-thought-out strategy for managing your inventory will help you avoid the consequences of getting it wrong. Implement an efficient inventory management system (IMS), forecast customer demand, conduct regular stock takes and proactively clear aging stock before it loses value.

Seasonal High and Lows

It’s natural for most businesses to have a peak period where sales are higher than the rest of the year. Busy periods also usually come with higher costs – you’ll need to hire more staff and buy more materials or stock to meet customer demand. Alternatively, quiet periods can also be damaging for your cash flow as less money is coming in. It pays to understand your business’s seasonal cycle, as well as other potential risks so that you can effectively forecast your cash requirements ahead of time.  

Inappropriate Business Funding Facilities

Business finance is not one-size-fits-all. Your requirements will change as your business grows and changes over time. If you’re a stable, established business with assets to offer as collateral, a business loan maybe option for you. If you have a growing that needs flexibility of funding that scales with your business as you continue to expand, a working capital finance facility or sometimes known as an invoice finance facility might be a far better fit as such a facility is based on the sales/revenue that your business makes each month and not on the bottom line profitability . Whatever you choose, make sure to continually review your options to make sure you have access to the funding facilities that best suit the requirements of your business.

Don’t let a lack of cash hold your business back. Working capital finance allows your business to use your unpaid invoices to access funds within as little as 24 hours of the invoice/s being issued and verified. Unlock tomorrow’s cash flow today with OptiPay.

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