So many startups fail before they ever really take off. There are many reasons for this, but one of the biggest is cash flow. It takes a lot of money to get started, but if cash doesn’t flow inwards quickly enough, then a company will fail. You might have employees to pay, suppliers to pay, and even fixed overhead commitments. If your income doesn’t cover these, then you may have no choice but to wind your business up.
The trouble for many companies is that payment is owed yet not paid quickly enough. You’ve made the sale, but you have to wait days, weeks, or even months for that cash to be in your bank account and ready to pay. In the meantime, your bills keep piling up, and you’re operating at a real-time loss. Chances are your terms to pay suppliers aren’t nearly as favorable as the terms your customers are getting from you. So how do you cope?
How Do Small Businesses Get Into Cash Flow Crises?
A cash flow crisis will occur when you can’t pay a bill on time. If you exceed your terms, the chances are that company will never do business with you again. As for payroll? You have to pay the wages on time as agreed with the employee’s contract. You undoubtedly want to. Afterall, that member of staff has turned up to work every day and put in the effort needed so your company can trade.
A crisis can occur when you can’t meet the repayment date for loans or credit your business has taken out. Banks, in particular, react very badly to this. They might immediately impose additional levies and fines. And they might even send round the payment enforcement team. This can be incredibly embarrassing on your business premises. It causes concern for your employees. They might seek alternative employment if they fear your company is not doing well.
Of course, if your customers or suppliers hear you’re struggling financially, that could be enough for them to stop their accounts with you. They may go to a competitor instead. It’s important to keep up morale in the business and work to find solutions. The trouble is, you are a small fish in a big pond, and you can’t afford to lose a single customer.
Every industry can suffer in this way. As a retailer, you might find that a lot of customers pay with credit cards. Waiting for the card company to pay you can tip the balance between a healthy bank account and debt. In the construction industry, projects can take months or even years. Some companies won’t get paid until the job is complete. Then there may be sixty or ninety-day terms on top of that. Of course, in the meantime, you need to pay wages and buy tools, equipment, and materials.
The transportation industry isn’t free of this problem either. Vehicles must be serviced and maintained. Fuel must be topped up. There are insurances to pay and drivers wages to cover. All of this adds up to a big bill. If your client is on a ninety-day term, you’re paying out long before the cash arrives in the bank for the job you’ve done. You simply won’t be able to scale up and buy new vehicles, or even take on more jobs until those costs are covered.
Why Cash Flow Problems Will Get In The Way Of Scaling
As you can see, a lack of cash in the bank means there is no money with which to invest. In some cases, you may not even be able to take on your regular jobs you’ve committed to. If you can’t cover the cost of the sale in the first place, your business might be dead in the water.
Scaling requires investment. You might be turning over hundreds of thousands, but if those monies owed aren’t in your account, how can you invest? On paper, you’re making a good profit, but the cash flow isn’t in your favor. You can’t attract new suppliers if your credit report or bank account statements aren’t looking as healthy as your orders spreadsheet.
You won’t be able to buy more goods or materials for production unless you too can agree to lengthy payment terms. But do you want to risk that debt? What if something happens and those monies owed still don’t arrive on time? It’s a vicious cycle.
How Can A Small Business Resolve The Cash Flow Woes?
Resolving cash flow woes needn’t be as tricky or time-consuming as you might think. Start as you mean to go on. Make sure all your payment terms are in your favor. You are within your rights to ask for cash at the time of handing over your goods. Be wary though, business to business sales are rarely made in cash and instead need time to go through the accounting process. If you change your payment terms, you might lose some of the biggest business clients you have
You can see if you’re eligible to use a factoring company. These businesses exist to pay you monies that owed immediately instead of having to wait. There is likely to be a small percentage deduction in the total sum, but it means your cash is there waiting for you when you make that sale. Companies like Business Factors take all the administration headaches out of accounts payable too. That saves you time that you could spend scaling up your business.
You could also change your business model. You might introduce more direct ways of selling or products that are a lower value, like consumables. Customers might be more inclined to pay in cash. Introducing a charge to cover your credit card transaction fee is not a good idea, and this practice is being banned in many places. Changes to your business model in this way might help you scale up quickly with limited investment. This is because you have a regular trickle of inbound cash.
Borrowing more money or finding an investor are also popular solutions. Factoring is not the same as borrowing because you don’t need to pay the lump sum back. Instead, you will probably take a small percentage drop in the total monies you are owed. Banks, however, will demand payments from you every month that can be difficult to cover if you haven’t solved your cash flow problems. You will also be charged a large amount of interest and incur fees if you cannot repay on time.
Some investors are happy to take shares in your company rather than expecting regular repayments of the cash amount. There are benefits and disadvantages to this approach. Firstly, you may have strangers on your board that might make business decisions you don’t agree with. They may also have the power to sell their shares at a later date to another company or person you don’t want to work with. Of course, the cash will be there quickly, and can often be much more than you needed so you can invest straight away.
How To Start Scaling Up
It’s important to resolve all of your cash flow woes before you place and scale-up plan into action. If you’re using a factoring company, this could happen quite quickly. Start to examine your historic sales for the past year and the year before. If you have any other years of data, it can be useful to compare them. This will give you an idea when the busy periods are, especially if the figures suggest your product or service is seasonal in demand.
Ideally, your scaling plan should allow you to be ready to handle extra orders beyond your busiest time. This means you can cope with those orders plus your scale without any difficulties. Now you need to determine any changes to your variable costs should you be able to increase your sales or orders. If your fixed costs need to change, you need to identify what the total cost of that change will be. You might need new premises or additional equipment to grow.
Every business should constantly check the relevance of their current marketing strategy. Chances are yours will have to change completely if you want to scale up. The benefits of scaling include a lower cost per unit, and the opportunity to enter new markets. This needs to be researched thoroughly so you can be certain you are pricing your product appropriately.
If you have not yet secured the orders for scaling, your marketing strategy needs to address this first. How are you going to reach and communicate with your new customers? What are their problems that you hope to resolve? Will they need free samples of your product to be convinced of your benefits? All of these considerations will help you identify the costs of marketing your product or service to these new markets.
Now you have your cash flow under control, you’ll be able to see what financial resources you have to plow into your marketing efforts. You’ll be able to accurately gauge the speed and volume of your upscaling limits. Most importantly, you’ll have a detailed plan that will allow you to grow at a pace you can financially keep up with.
