How to avoid cash flow problems in business

August 27, 2015 : Ife Adedapo Leave a Comment

IFE ADEDAPO writes on how entrepreneurs can avoid practices that lead to insufficient cash flow

Many business owners, especially start-ups, have difficulty in managing their cash flow, a situation that makes it difficult for them to manage their business operations appropriately.

In a bid to attract customers and drive sales, most beginners in business offer discounts and give extended credit period to loyal customers.

Investment experts observe that after sometime, entrepreneurs are unable to replace stocks and have difficulty in meeting customers’ demand, and to cap it, the once booming business begins to deteriorate.

Among the mistakes such business owners make as highlighted by experts is obtaining loan at high interest rates with a short repayment period.

They observe that such business owners rather than investing the funds in products that can bring in return on investment within a short period, they spend it on high-priced infrastructure that have no immediate returns.

In business, experts say cash is king and for a new business, a regular cash flow is very important. According to them, all activities revolving a round business require cash, and when it is not properly managed, the business may fail.

Manage credit handouts

The practise of extending credit to customers involves giving them the option to purchase products or services now and pay for them at a later date.

In most manufacturing and construction industries, experts note that credit are extended through invoices, but that may not be practical for every business.

According to them, the pros and cons of extending credits have to be weighed.

A financial expert, Mr. Paul Chibuzor, says that credit extension has to be selective; as such he says business owners have to launch an investigation to determine whom to give, how much to give and the number of days to give for payment.

He says, “Start-ups should consider extending credit if that is the only option required for customers to buy from them. If handled very well, it can keep the business afloat. But if not managed properly, it can lead to business failure.

“When extending credit, the cash required for business operation within the period given for payment has to be recouped through other means.”

According to him, this method helps in strengthening business-to-customer relations and reduces unnecessary emphasis on the price of the products or services.

Have a good cash planning

Chibuzor says it is important to understand the amount of money that goes into expenditure and incoming cash over a period of time.

This, he adds, will help you to make budget for each month, make investments and have enough to meet with unexpected cash obligations when it arises.

“After studying your cash flow for some months, make an estimate of expected revenue from services or goods for the next month. For a small business that has obtained loans from banks, ensure that the profits from the business are able to cover the recurrent expenditure and repay loans,” he says.

Get your pricing right

Experts observe that companies experiencing cash flow management problems may have under-priced their products and services to satisfy their customers.

Explaining the dynamics of pricing, a business consultant, Mr. Jide Oshiyemi, says that increasing your prices may lower sales volume slightly but will enable the business manager to make up for decreased volume with higher profit margins.

According to him, lowering the prices can as well increase profits because the level of patronage will increase significantly.

He says that the market’s response to higher prices should be tested by changing prices in targeted areas.

He adds that price review should be carried out on an annual basis.

In order to reduce cash flow problems, Sage accounting offers some suggestions:

Stay on top of stock management

It says that efficient stock management is just as important as managing cash flow.

The organisation suggests that business owners should reconcile their stock records at the same time when they reconcile their bank accounts – either weekly or monthly.

“This way, you will remain on top of items that you have left in stock and those that require reordering. An efficiently managed stock control system will have a positive impact on your cash flow because you will never be holding too much stock, or have all your money tied up in it,” it adds.

Tighten up on your expenses

Sage suggests that avenues through which cash leaves the business should be re-examined to identify loopholes.

It says, “Assess the frequency with which you pay suppliers, tax bills, utilities. Is it possible to pay in installments or make terms more flexible? Use your powers of negotiation to strike deals that are favorable to you and your business.

“Also, check on all those little things you spend money on that can add up – as the old saying goes, watch the pennies and the pounds will take care of themselves.”

Anticipate problems before they happen

Sage notes that monitoring market conditions and observing the trends can help businesses to identify problems.

It adds, “Identify potential cash flow problems in advance by regularly updating your cash flow forecast, monitoring market conditions, keeping an eye on customers and suppliers who may be in trouble, and taking action as soon as you see a problem.

“Don’t bury your head in the sand and hope an issue will go away. By keeping on top of your cash flow you’ll be able to deal with problems quickly and efficiently.”

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