Many entrepreneurs and business owners think that all growth is good. They dream of opportunities for a rapid surge in demand and an increase in revenue. But fast business growth can also create some pretty serious cash flow issues. Which can often lead to other, more serious business problems, like closing down… permanently.
Any additional revenue from increased sales usually takes time before it can cover the expenses accrued for ramping up production. That’s why cash flow management is critical for any rapidly growing business to expand successfully.
Here’s how you can reduce potential issues and keep everything running smoothly before business starts booming and cash flow nosedives.
Keep Your Terms Short
Many small businesses typically operate within tight budget constraints. This means they constantly require prompt collection of all receivable payments to pay their own supplier invoices on time. So, one of the main reasons many small businesses experience problems with their cash flow is late invoice payments from their customers. To avoid these problems with cash flow, you need to implement some invoicing processes and collections strategies which will work efficiently for your business.
Best practices typically include keeping your terms short and only extending credit to clients with a verifiable history of prompt payments. To improve the prospect of on-time payment, there also needs to be a pressure plan for enforcement of late and outstanding invoices. You can also go the other way and offer discounts for advance payments as getting receivables cash early ultimately helps your cash flow.
Don’t Lose Track Of Expenses
When a business starts growing rapidly, the outgoing expenses can very quickly get out of control and start expanding faster than the incoming sales. Especially if you’re not paying attention to them. The best way to ensure you’re never in the unenviable position of constantly coming up short for cash is to carefully keep track of all expenses. Besides, if you’re regularly controlling and examining expenses, you may be able to reduce some of your overheads.
Finding places where you can cut costs isn’t always easy. But if you can reduce or even remove some expenses from your budget without negatively impacting the business, it will ultimately have a positive effect on your cash flow overall. You could try convincing suppliers to offer you better terms or a discount for early payments. Remember that learning the art of negotiation is essential for any business, and a few creative adjustments may be all you need to protect your cash flow.
Ensure Your Internal Processes Aren’t Falling Behind
If your business is expanding too soon or too fast without a concrete plan to ensure sufficient cash flow, it can just as quickly put you into the red. One of the most effective ways to avoid this is by doing a growth diagnosis to ensure your company’s internal processes aren’t falling behind. By taking steps to manage your internal processes now, you’ll be able to better manage your cash flow and core resources when you do experience a spike in sales.
Ensure all internal processes aren’t falling behind by completing a comprehensive diagnosis of all aspects of your business, such as sales, receivables, overheads, assets, and inventory. Then take whatever steps are necessary to control any internal processes which are absorbing too much cash flow. Analysing the internal processes of your company will help you define refinancing requirements while managing cash flow growth and avoiding future liquidity problems.
Optimise Your Pricing
Your pricing will typically have the biggest impact on your cash flow. If your pricing is too high, you won’t sell much of your product. And you may sell more product with lower pricing, but you won’t generate enough profit if it’s too low. In recent times, businesses that have traditionally imported and outsourced their production have turned to localising their manufacturing, as import costs have continued to rise.
When it comes to increasing prices, many business owners assume it will lead to a reduction in sales. But it’s a good idea to experiment with product values to create a solid base to model your pricing on. That way you’ll be much less likely to make pricing mistakes with long-term effects when you’re under the pressure of reduced access to cash. And keeping your profit margins high while prices stay competitive is one of the most effective ways of ensuring your business will always have a sufficient flow of cash coming in.
Even with careful planning, you may still end up in a tight spot with a reduced cash flow. This is why it’s a good idea to have a backup plan to avoid panicking and making rash decisions. Whether that’s a separate reserve of savings or access to a line of credit, a fresh cash injection is only a temporary fix. It certainly won’t solve any ongoing cash flow problems.
So, no matter what your business is or how big it is, just remember that it’s important to have the foresight to better manage your available capital. Ultimately by understanding the possible challenges with cash flow, you can effectively plan for rapid growth while taking whatever precautions are necessary to succeed.