According to a study conducted by US Bank, as many as 82% of businesses fail because of cash flow issues. This recent study highlights just how important cash flow is, and how few businesses get managing money right.
Trying to balance books amidst a pandemic and subsequent global economic recession is far from easy, and can cause significant stress for big and small business owners alike. But it doesn’t have to be that way.
Businesses struggle to regulate cash flow due to a variety of reasons. From supply chain issues to late payments, there is an endless string of financial problems that can arise across industries.
However, it is the way in which businesses are approaching money matters that typically causes the most strain. Poor financial management practices are the number one reason why businesses fail, which is why we’re going to focus on how to correct them.
Why Is Money Management Such A Common Problem?
JP Morgan Chase & Co surveyed over 600,00 small businesses and found that the average business only has 27 cash buffer days. This means that if your business doesn’t start shifting its approach to sustainable cash flow management, it could head towards financial disaster in less than a month.
Fortunately, there are some simple, actionable habits every business owner can adopt to regulate cash flow and alleviate some of the stress that inevitably comes with running a business.
- Chart out your cash flow
Navigating the choppy waters of business cash flow is one of the toughest parts of running a business. But that also makes it one of the most crucial. Fortunately, for the entrepreneurs of today, there are many accounting software platforms available to assist with this.
A digital cash flowchart can help you create easily comprehensive data spreadsheets that showcase your two main priorities: outflows (accounts payable) and inflows (sales of goods or services).
- Employ financial forecasting tools
Another useful digital resource you can draw from to support financial management is a forecasting tool. Being able to track incoming and outgoing expense patterns in order to predict future outcomes can be a game changer for the way you approach business money management.
- Stay closely on top of company debt
Debt is a fact of life for many people and businesses across the globe. But it’s not the accumulation of debt that is the real problem. It’s paying it back in a timely and sensible fashion.
Most companies rely on loans to set up a business and start generating profit. If you belong to one of those companies, keeping a close eye on interest rates is essential for avoiding financial ruin. It is particularly important to monitor variable rate loans, which can fluctuate over time.
Review your debt situation on a regular basis. Assess repayment costs, find out if your interest rates have changed, and determine whether your circumstances have changed enough to increase or decrease your debt funding. And always, always, always read the fine print.
- Regularly review expenditures and ROI
Monitoring expense and ROI reports is a reliable way to prevent excessive spending and adjust your financial strategy as needed. Quality accounting software should provide you with the ability to create reports based on balance sheets, cash flow statements, accounts payable/receivable, and depreciation.
It’s also important to monitor payroll, even if you outsource some of your work. For any growing company (regardless of size), this aspect of money management can be more complex than estimated.
- Build good business credit for loans
As your business grows over time, you may make the decision to take out a loan. Contrary to what you might think, loans are a smart way to keep your business afloat, while better, more lucrative systems are put into place. But to qualify for business loans, you need to ensure your tax is in order, and that you have a solid business plan and good credit.
Lenders look for clean tax records and proof that your business can repay the loan or that it has the assets to stand surety. With poor credit, receiving approval for business loans is also nearly impossible. So how do you build good credit? You pay off your debts fast, and you don’t take out loans with interest rates you can’t afford.
- Assess and adjust your price margins
There are numerous factors that influence what your price margins should be: location, visibility, industry, and desirability, to name a few. And to make things even more complex, consumer behavior is constantly changing, so you need to keep a sharp eye on whether your prices match up to market sentiments.
- Create an efficient billing strategy
A report from 2022 found that late and unpaid payments affect a whopping 87% of businesses. Receiving money that’s owed to you after the agreed-upon billing date is not just inconvenient, it can also seriously jeopardize your business’ state of financial affairs.
Therefore, it’s imperative that you organize your billing strategy in a way that makes it extremely difficult for late payments to occur. You can incentivize clients to pay promptly by offering small discounts for punctuality, providing diverse payment channel options, or penalizing lateness with a fee.
- Make financial management a top priority
Money management should not be an afterthought for your business. It should be at the center of every decision you make. Without a consistent cash flow and a strong grip on financial affairs, your business will be too vulnerable to bankruptcy and failure.
Make a concerted effort to not only monitor but continue to improve your cash flow strategy. Think ahead, stay focused on your financial goals, and be on the lookout for ways to increase efficiency.
If running a successful business was easy, everyone would be doing it. But in the highly competitive capitalistic society that we live in today, there is much more to money management than what meets the eye. Learning how to lift the financial strain on your business is key to helping it thrive in future.
By closely monitoring your cash flow status, regularly assessing things like ROI, billing processes, and profit margins, and cultivating healthy money management habits, your business will bounce back from financial strain stronger than before.