People tend to see cash flow as a relatively simply process. The simplicity seems to accentuated by the word flow. We imagine water traveling smoothly, unabated, from one end to another, a peaceful stream. It seems like a useful and fitting analogy when it comes to business income. Money leaves a customer’s hand or bank account and goes straight to the bank account of the business with whom they are doing the transaction. Simple.
Of course, dealing with business income, or cash flow, isn’t quite as simple as that. It can feel like less of a peaceful river and make like a turbulent waterfall; something dangerous, hard to grapple, and certainly not very pleasant to go down. Managing the cash flow of a business takes a lot of work – and there’s plenty of room for mistakes.
Managing that cash flow correctly is extremely important for the health of your business (obviously, right?). But a lot of mistakes are made in this area, often because there’s little understanding of how the problems occurred in the first place.
We’re going to take a quick look at the ways in which these income problems often occur, and the long-term solutions you can investigate that will help you resolve problems and keep them at bay.
Declining sales and profit margins
This is probably the first cause of such a problem that one would consider, and there’s a fairly good reason for it! After all, fewer profits is probably the most common cause of a disruption in business income. It may not always be that sales decline, exactly – it may be that you’re selling as expected, but that you’re still have income problems. In such a case, something went wrong during the planning stages. You must have a strong idea of how much of a certain commodity you’ll have to sell in order to break even – inaccuracies here can cause tremendous income problems.
Not selling enough may be remedied by increasing exposure. But if you’re selling plenty of products without making much profit, then you’ve probably got yourself in the unenviable position of having not charged enough for your product. Simply raising the price may risk you losing business. This is why you should consider developing a new product, striking up a partnership for distribution, or further developing the product so as to justify an increased cost.
Negative cash flow models
Offering finance options to customers can be one of the best ways to get business that you would otherwise have missed out on. If you’re offering items for an upfront cost which is fairly hefty, then finance is often the only way that you’re going to get most of your profits! Take a look at most guitar stores – because there are so many guitars that cost several hundred dollars, most of the stock will have finance options, which opens up the potential sales base tremendously. However, there’s always the risk that customers may not pay you back on time. But there’s a more general problem with this business model that you must consider.
A business that runs primarily on financing is a business that uses a negative cash flow model. This means that the bulk of the payments you have to make come before you received money from your customers. Let’s say you open a guitar store and start offering finance on all items straight away. The likelihood of you having all the money you need to cover your overhead costs in the first month may be very low, because you’ll only have (so far) received a fraction of the amount that the items you sell actually cost. A model like this needs other sources of revenue in order to balance things out.
Excessive spending
A shocking amount of startups face income problems simply because their outgoings are way too high. This can be for a number of reasons. Maybe you got a business loan to build your initial capital that came with incredibly high interest rates. Maybe you’ve hired too many employees, or you’re paying your employees too much. Perhaps you’re buying more stock than you actually need.
In many cases, this turns out to be a problem in the accounting department; or, rather, a lack of a formal accounting department! If you’re trying to handle the bookkeeping by yourself – a common mistake new business owners make – then you run more of a risk of overspending. Experienced accountants are much better equipped to prevent these sorts of problems from happening.
Getting a loan
Now we’ll try to focus a little more on the solutions that are open to you. One thing that can help is getting a loan. It seems like a fairly obvious solution, but it’s not one that a lot of business owners are comfortable doing – especially if they’re already paying back another business loan. But companies dealing specifically with cash flow finance can provide you assistance that banks or other lenders might not be willing to engage in. A cash injection is often a vital solution for many income problems, as long as you use it wisely.
Dealing with non-payment
Non-payment being such a widespread cause of business income problems. But this can be a particularly sensitive subject for many businesses. After all, how exactly do you compel someone to pay you? Sure, there’s legal action you could take, but what if this harms your reputation? At the end of the day, you need to make sure you stick to the terms to which you agreed – calling for early payment will probably get you nowhere. But if the deadline has long passed, you should probably seek the assistance of a debt collection agency.
Increasing methods of payment
The fact that you’re not seeing enough sales isn’t always due to the charging too much or a lack of product quality; many businesses are actually quite prohibitive when it comes to accepted payment methods, which closes them off to a lot of revenue potential. Brick-and-mortar businesses that only take cash, for example, are going to lose out on a lot of potential revenue from credit or debit cards. Online businesses will want to consider accepting payment from sources that are sometimes ignored, such as American Express or BitCoin.
