How To Overcome Cash Flow Problems

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When I still ran my custom cycling wear business, I thought I was on top of the world. There I was, already achieving success that seemed unattainable for many small businesses, and I hadn’t even turned 30. Of course, like every good story, there’s conflict involved. My arrogance led me to an overwhelming debt that had me desperately crunching numbers.

I had to re-examine all our business expenditures and it made me realise that the way I handled my finances wasn’t sustainable and that I had to change my financial operations.

I learnt the hard way how cash flow problems can stunt a business’ growth. Small business owners, like my past self, can often brush these aside as “minor” issues with the thought that these problems will resolve themselves. However, you need to be at the helm of every financial process to stop potential problems. It’s important to be on top of your numbers, so that you can properly allocate your budget and keep track of how much money is going in and out of your business, preventing major cash flow problems (and headaches) in the future. 

Being mindful of your budget, allocating the money in the right places and monitoring your business’ financial health is possible as long as you’ve got the right systems in place. 

Common cash flow issues

So many businesses are riddled with potential cash flow problems because they can’t foresee the problems and inefficiencies they may encounter with their current systems or processes. Without proper budgeting or accurate bookkeeping, you might end up dealing with figures that are so far-flung from what you originally expected. In order to enjoy smooth sailing in terms of your finances and spending, you need to identify these problems and resolve them right away. 

Common cash flow mistakes that business owners make include:

  • Spending the same amount every month despite lower revenue - If you’re not making the same amount of revenue this month, make sure your receipts don’t run as long as last month’s. Spend smart and be conscious of your numbers. 
  • Overestimating future sales - Sales forecasting is important, but you need to be realistic in order to predict accurate numbers. You might want to shoot for the moon in this area, which isn’t necessarily a bad thing, but always ground your predictions in actual numbers that you’ve observed rather than ones you’re projecting. 
  • Not having a cash reserve for emergencies - A cash reserve can help you out in months when you need to cover more costs but aren’t earning as much. In my years of experience with business and business coaching, I noticed that at least two months’ worth of cash should be reserved for emergencies to cushion any financial blow you may face. 
  • Neglecting past-due receivables - While sales may feel good in the moment, you need to remember that closing that sale isn’t the end of the transaction. You need to make sure you collect all the payments from your customers before considering the deal done. 

Managing cash flow problems is a balance of looking back on patterns in the past and, with that information, forecasting what could happen with your revenue in the future. You need both to frame how you’re going to approach the situation and effectively manage your budget and finances. 

5 ways to best overcome cash flow problems

Managing your finances means having to navigate cash flow problems in order to get your business to stay on track to success. Here are five tips we highly recommend you follow to best lay out possible solutions to these problems. 

  1. Create separate bank accounts 

Separating your bank accounts is helpful because you’re able to allocate a percentage of the budget to each one and not have to worry about scrambling to divide it all up every month. Percentages are easier to deal with compared to specific amounts because revenue on month one may be different from month two and you won’t have the same amount to go around in each area. 

Having percentages is straightforward and ensures that every aspect of the business is adequately covered. In case one part of your business needs a little more money allotted to it, you can easily adjust those percentages.

Here are five areas in your business you need to make bank accounts for:

  • Revenue
  • Profit
  • Salary
  • Taxes
  • Operational expenses 

So every month you might want to allocate the majority of your budget, about 60%, to operational expenses. You place 15% in salary, 5% in profit and so on, it all depends on what you’re earning and what you’re realistically predicting for your business as a business owner. 

  1. Spend in line with your income

When I was still running my previous business, I was spending a lot of money–even on months where I didn’t make as much as the month prior. Revenue would come in and, even if we were struggling, I ignored the fact that we weren’t raking in as much cash. Soon, we were pretty deep in debt–all because I couldn’t spend in line with what we were earning.

It’s important to stick within your means because it’s better to underestimate your revenue than overestimate it. Treading carefully when it comes to your finances is better than trying to take big risks. 

  1. Take your time forecasting properly

Revenue forecasting is crucial to your business and to overcoming cash flow problems because it helps you understand just how much you can expect to come in–whether it’s the coming month or the next few months. This is all based on trends and what your business has already been enjoying revenue-wise beforehand

By employing proper budgeting techniques, you can nail your estimates and come very close to your forecasted numbers. Your forecast gives you a realistic picture of the future of your business, all anchored to real numbers you’ve already reached in the past.  

  1. Review your pricing model

A pricing model is how you determine the prices of your goods and services. In order to best figure out how much to charge for your products, you need to make a comprehensive analysis of what it takes to produce them, the customers’ perceived value of its worth and other factors that can play a role in determining prices. 

If you price your goods and services poorly and without thought of the labour that goes into them, you may end up losing out on some revenue because your product is much better than priced (maybe it’s long-lasting or unique, something that doesn’t always reflect in the cost of materials) or you may be pricing too high, leading to fewer sales.

  1. Apply for loans

A direct solution for cash flow problems are loans–but you need to be prepared to apply for them. Applying for loans isn’t easy, as you need extensive documentation and a good prediction of when your business will start picking up speed to be able to make your repayments. So you need to make sure that you’re in the right place to apply for loans.

If your business is in the right place in terms of systems and processes and all you need is a small boost in finances in order to get things running, this is a great solution for you. 

Overcoming cash flow problems is all part and parcel of running and trying to scale your small business. It’s no easy feat, but it’s a challenge that you can definitely conquer given the right tools, processes and mindset. As long as you successfully identify the problem, diagnose it and execute a possible solution, you’ll have a better grasp on your finances and a better hand on the wheel of your business.

If you want to grow your business even more and become more adept at handling cash flow issues, expert guidance through business coaching might just do the trick. I’d love to help you figure out your financial hurdles. Book a one-on-one or group coaching session with me, tell me all about you and your business and we can figure out a plan for you. 

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