Your small business needs a stable cash flow management strategy to maintain operations, pay employees and suppliers, develop products, and sustain profitability. Poor cash flow has a negative effect on all aspects of your company. If you fail to address this problem immediately, it may lead to the failure of your business. Short-term cash flow problems have solutions. Identifying the causes of your cash flow problems enables you to determine the right solutions.
Identify these common causes of poor cash flow so that you can avoid or solve them.
Erroneous Product Pricing
The price of your products either has a positive or negative effect on your cash flow. In some instances, your pricing might be too high for your target market. They look for comparable features from a brand that offers a similar product for a lower price. Fewer customers mean you’ll have lower sales and profits. A price that’s also too low won’t be enough to offset the costs of development, sales, and marketing. The revenue that it generates will be insufficient for your plans to grow your business or in a worst-case scenario, it may not be enough to sustain operations. Before you establish a price for your products, analyze your competitors’ prices and the amount your target market is willing to pay.
Poor Performance of Products and Services
Low profits from underperforming products and services have an adverse effect on your company’s cash flow. Potential customers may have apprehensions about shopping from your online store. This might be happening because of poor user-interface, lack of options, confusing page layout, and others. Improve your cash flow management by focusing resources on products and services that your target audience patronizes the most. You might also need to change your sales and marketing strategy to attract and convert more potential customers. Use the data at your disposal to learn more about your target audience. This enables you to customize your pitch and add features to your products that they might appreciate.
Overexpansion to Different Markets
One of the causes of poor cash flow is overexpansion. Your business might not be able to fund operations in another city, country, or another branch. You’re spreading resources thin that negatively affects the productivity and efficiency of your employees and the effectiveness of your sales and marketing strategy. Before you expand to a new city, assess your business’ financial capabilities. Do you have excess resources to withstand low sales and profits? Are you patient enough to persevere in a new market? The answers to these questions enable you to determine whether you can enter a new market or not.
Mishandling of Debt
Debts can be an advantage or a disadvantage for any growing business. A loan can possibly inject additional cash to a plateauing business. However, if you mishandle your loans, you might create a cash flow problem. Identify the needs of your company and determine if borrowing money is a solution. Assess your company’s financial situation and capacity to pay the loans’ payments on time without reducing your flexibility. Determine if your business only needs a short-term loan or a long-term one so that you avoid tying your cash up. This may hamper your operations and stunt your company’s growth.
Too Many Withdrawals
Some entrepreneurs withdraw too much cash from their business accounts for different reasons such as injecting more resources into operations, marketing and sales, product development, payments to suppliers, and others. These may be valid reasons, but it negatively affects your business’ cash flow. This harms the growth potential of your business. Improve your cash flow management by prioritizing withdrawals that have a direct positive impact on your company. Identify which aspects of your business require additional resources. Doing so allows you to boost efficiency and maximize each dollar spent.
A business’ growth derails when owners and their team spend too much. Their costs are substantially higher than their profits. This results in dwindling resources to fund all aspects of operations, which might lead to bankruptcy. One way to avoid this problem is to create a budget and follow it. A budget enables you to monitor expenses and identify which aspects of operations you’re spending the most resources on. Assess your expenses and determine if they’re improving efficiency or boosting profit, if not you might want to consider cutting or reducing the transfer of resources to them.
Lack of a Financial Strategy
Some small businesses come and go, but those that last implement a particular practice that not just keeps them afloat, but also leads them to success. This practice is implementing a financial strategy. If you don’t have one, you’ll most likely overspend or lack direction in funding different aspects of your business. This wayward approach is detrimental to your company. You’ll consume resources inefficiently in ways such as launching campaigns that target a demographic that isn’t interested in your products, enter a new city without understanding it, and developing products without a profitable audience that will buy them.
Insufficient Warehouse Management Planning
Poor inventory management results in overstocking or a low supply of products. Too many stored items incur costs that you can’t turn into cash because of low customer demand. Low supplies mean that you don’t have enough products even if there’s high demand for them. In either case, your business can’t generate enough revenue to offset expenses. This drains your resources and reduces your financial flexibility. Invest in an inventory management system to avoid this problem. Doing so enables you to monitor inventory and determine the appropriate times to restock.
Your business needs a steady flow of revenue to remain profitable. You may have plenty of receivables, but your ability to collect them can either constrict or improve your company’s cash flow. Establish a collection policy that eliminates delayed payments. Communicate this to your team and implement it. Inform your customers about your policy so they can follow it whenever they transact with your business.
These are some of the causes of poor cash flow you need to be aware of. Improve your cash flow management so that you’ll manage and distribute your resources more efficiently. We at Robookkeeper can update your accounting books so that you’ll know if your business’ cash flow is stable. We provide first-rate virtual bookkeeping services at a competitive price.