Most businesses encounter a cash flow problem at one time or another. Fortunately, most cash flow problems can be prevented with a bit of preparation and the right strategy.
This article lists the 3 most common cash flow problems, along with ways to solve them.
High overhead expenses
Overhead expenses are the costs of running a business that are not tied directly to selling a specific product or service. Examples of overhead include rent, telephone, utilities, etc. Sometimes overhead expenses get out of hand relative to the revenue the business produces. High overhead expenses can hurt your business’s cash flow.
High overhead expenses are particularly challenging because they are persistent. These expenses affect your cash flow every day until the problem is corrected.
The solution to this problem is simple, but it is not easy. Audit your expenses and cut back where you can. Be careful not to cut too much, as that approach could also hurt the company.
If you cannot cut back, consider cheaper options. In fact, every business should audit expenses regularly to ensure that overhead expenses stay in line.
Slow-paying invoices are a common cause for cash flow problems. As a small business, you have to offer 30-day to 60-day payment terms to clients. However, small companies can’t always afford to wait this long for payment. They need money sooner. Eventually, slow payments create a financial problem that can seriously affect your business even if it’s growing quickly.
There are two ways to solve this problem. One solution is to provide clients with an incentive to pay faster. An alternative is to use invoice factoring to finance slow-paying invoices. This method improves cash flow immediately and enables you to offer payment terms with confidence.
Insufficient gross margins
Small businesses sometimes sell their products and services for such low prices that they have low, or negative, gross margins. This scenario often happens in highly competitive environments with constant pricing pressure. It usually affects small business owners who do not have a clear understanding of their costs.
To solve this problem, audit all your products and services to determine the all-inclusive cost of delivering your products and services. This step is difficult but necessary. Once you have determined the all-inclusive cost, do the following:
- If you can, raise the prices of products/services that have weak margins
- If you can’t raise prices, consider dropping products/services that have weak margins
- Ensure that all proposals price your products according to their cost
Flex Capital offers a fast, effective invoice discounting solution that injects cash flow into your business.
We also offer Structured Finance and PO Funding options.
The source of this article can be found here.