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Why Cash Flow is a Leading Cause of Small Business Failure

Starting a small business is an incredibly exciting thought that most people have thought about doing at some point or another. Australian entrepreneurs are incredibly motivated by the desire for independence, with over 57% (the highest in the world) of all business owners citing it as their reason for starting. Running your own business means being your own boss, deciding what you work on an when. If you have a fantastic product or service idea, marketing skills and the means to sell it to consumers or businesses who demand it, there is a substantial opportunity to make an independent living. 

With independence comes great responsibility, and the odds aren’t in your favour. According to the Australian Treasury, 70% of nascent (new) small businesses had failed or still yet to start active operations after three years. While you may have a fantastic business plan on paper, successful execution is complicated with many unsuspecting challenges arising along the way. It’s well known that cash flow difficulties are the number one concern facing small businesses with ASIC reporting poor cash flow as a factor in over 40% of failures. Why is this the case, and what can you do to maximise your cash flow and increase your chances of long term survival?

Poor Cash Flow is Related to Other Issues 

Cash flow is not an isolated issue. It is heavily linked to other contributing business factors. The same ASIC report also found that a similar amount of small businesses blamed poor strategic decision making as a contributing factor as well as trading losses (inability to make a profit) cited as the cause for a third of businesses. 

“If your cash flow struggles, it’s highly unlikely profitable trading will follow”

A poorly managed company – whether that’s strategic direction, planning, budgeting or employee relations – will most likely not have an effective plan to collect payments, monitor expenses and sustain sufficient cash flow. If your cash flow struggles, it’s highly unlikely profitable trading will follow. This situation can only last so long before insolvency kicks in. Instill a management focus on improving cash flow in your business and the flow-on effects, including company transformation, will be numerous and impactful.

What You Can Do to Improve Your Small Business Cash Flow

There are many tactics you can implement to improve the flow of cash in your small business. It’s essential to measure, track, control and improve all aspects of your business strategy and financial accounts. Here are four techniques you can consider implementing:

Set a Budget and Stay on Top of Accounts

Create a business budget to have a clear view of where your incoming funds are coming from and where your outgoing expenses are going. Set a plan detailing how you expect your cash flow to look in advance.

Cut Discretionary Costs in Your Business

Understand where your business and employees are spending money. If you’re not currently tracking your expenses on a line-by-line basis, make it a priority. Any cost, such as travel, dining or stationery that does not further your company’s agenda or relationships with customers can get cut immediately. Communicate this with your staff, review and enforce it regularly.

Minimise Late Payments from Customers

Reduce late-paying customers and unpaid invoices. If you have outstanding invoices on your account, consider how you can improve your processes and relationships with your customers to get them to pay what they owe sooner.

Negotiate Longer Payment Terms with Suppliers

Retain cash for as long as possible. In addition to reducing expenditure where possible, try to negotiate longer payment terms with your suppliers. If you bundle purchases together, you may get a better deal.

Consider External Funding Sources

If your cash flow and working capital position still are not where you’d like them to be after implementing these strategies, or you’re looking to take your business to the next level, consider external funding sources.

Does your business own outright a range of commercial assets or equipment? Consider a sale and leaseback agreement. By selling your assets to a lender and having them lease it back to your business, you will free up cash, immediately improving your cash position and financial stability. 

“Debtor finance allows your business to access cash sooner from unpaid invoices”

Another increasingly popular solution is debtor finance. Debtor finance allows your business to access cash sooner from unpaid invoices. Debtor finance providers will pay you up to 90% of your verified outstanding invoice value upfront. When your customer pays and the funds are received by your invoice finance provider, they’ll remit the remaining 10% minus a small fee to compensate for early funding. Your business can use this cash instantly to pay your bills, secure new suppliers or invest in growth opportunities. 

Don’t let poor cash flow hold your business back, improve your growth prospects by unlocking tomorrow’s cash flow today with OptiPay.

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