With a small to medium-sized business, everything has an impact on cash flow, and cash flow is one of the most crucial metrics for business owners to monitor. As cash flow issues occur within a business, decisions are made based on inaccurate data and it will ultimately hurt a company in the long run.
What Are Cash Flow Issues?
It goes without saying that positive cash flow is the lifeblood of any business and negative cash flow is to be avoided. Issues with cash flow can be caused by things that are out of a business owner's control or things within the business that can be rectified before it gets too out of hand.
Cash flow issues arise when a business does not have enough cash to cover its liabilities. When the cash outflows exceed the cash inflows, a business will run into the issue of not being able to pay debts and expenses. Issues like this can be caused by low net profit numbers, delays or errors in accounts receivables or overspending on inventory and other expenses.
How Can Cash Flow Issues Affect A Business?
When the cash gets tight, business owners are faced with many tough decisions. It can result in things such as falling behind on accounts payables, missed opportunities for business growth, or can go as far as business closure due to insolvency.
So to avoid all of these negatives, business owners must hone in on understanding how and why a business may experience cash flow issues. Here are some of the most common reasons and ways to help keep them from happening:
Decreasing sales and low-profit margins. Selling products and services at too low of a cost can result in low-profit margins. When a business doesn't have a well-developed pricing strategy, the cash coming in for each sale of goods or services will be lower than necessary. At this point, business owners must step in to reevaluate their price structure or discontinue products or services with weak margins to focus their attention on the money-makers.
Outstanding accounts receivables. Having delays in the invoicing process or the collection of invoices will leave a business with no inbound cash flow. One of the best ways to go about correcting a major accounts receivable issue like this is turning to software technology like NetSuite to automate the entire process.
Overestimating growth periods. When a company is projecting growth, it is important to be realistic about those expectations. If a business overestimates its projected growth over a period of time and the expenses during that period are based on the expected inbound cash, it could leave a business with an expense account that exceeds its working capital. More accurate forecasting tools will greatly assist in preventing this from happening.
Too much inventory on hand. Overstocking inventory can put a business in a jamb if sales are not covering the investment costs. By using an inventory management system, businesses will be able to accurately monitor their inventory levels, set reorder points and ensure that warehouses are not being overstocked with unnecessary items tieing up funds.
Seasonal business structure. In a business that has on and off-seasons, those fluctuations must be accounted for when anticipating times of larger expenses. If not, it can lead to less-than-ideal cash flow situations. Accurately forecasting for these busy periods and slow periods will give businesses the ability to closely monitor the cash going out and better align with times when cash inflow is higher.
Inaccurate forecasting and bookkeeping practices. Not every business owner has the skill set to handle the forecasting and bookkeeping tasks as a business grows and becomes more complex. There are many software systems out there that can provide a crutch, but at the end of the day, a business owner will have to expand their team and decide between two options: hire an in-person bookkeeper or turn to an outsourced bookkeeping professional.
Consider Outsourced Bookkeeping to Help Avoid Cash Flow Issues
Outsourced bookkeeping is perfect for small to medium-sized businesses as it allows business owners to step back and focus on more important tasks at hand. An outsourced bookkeeping service provider like AccountingDepartment.com can provide the technology stack, forecasting tools, reporting, and more to provide business owners with accurate and timely data that will help catch and prevent cash flow issues.
For more information, reach out to AccountingDepartment.com today to speak with one of our Business Development Representatives about how we can help you and your business.