The absence of a “predictable paycheck” is scary, but the rewards of owning your own business far outweigh those risks. A fractional CFO can help your business on a short-term or part-time basis. Many startups use fractional CFOs until they have the budget to hire someone full-time. But experienced businesses may benefit from this expertise as well.
A cash buffer is essentially a financial safety net for your business. To determine how much cash buffer your business needs, you’ll divide cash balances by cash outflows. This will tell you the number of days that your cash on hand will be able to make up for no incoming cash flow. Poor cash flow occurs when cash inflows don’t keep up with cash outflows. Unexpected expenses lead to shortfalls that create stress if the business owner doesn’t have access to capital like lines of credit or even business credit cards to help tide them through. On a fundamental level, cash flow problems occur when a business has too many expenses without enough revenue.
Invoice clients immediately after work completed
Manufacturing too much can be as harmful as manufacturing too little. But by matching your production efforts with accurate sales data, you can avoid sitting on large pools of inventory or raw materials. Depending on the size of your company, you should invest in just-in-time manufacturing tools to help you manage the appropriate balance. Otherwise, consider tuning or expanding your analytics capabilities for more precise insight into your needs.
Also, introduce new technology to automate repetitive processes and do more with less manpower. For example, if you rely on shift workers to operate your business, overbooking employee shifts could lead to unnecessary expenses that don’t translate into returns. High rates of employee turnover, job redundancies and a lack of automation also come with avoidable costs. Employee salaries and wages are a large part of your outgoing expenses. Therefore, poor employee management can lead to cash-flow problems — and possibly layoffs.
How to Manage Cash-Flow Problems in Your Business
An individual sale does not necessarily mean positive cash flow. For example, if the item or service is not appropriately priced to account for all related expenses — along with a profit margin — you could be losing money. Admittedly, some businesses will take a hit on a small ticket or baseline offerings with an eye on recouping these losses with later, large ticket or add-on purchases. But if these losses are unintentional — such as increased shipping costs or energy use — increased sales may result in a shrinking bank account.
Plenty of companies have gone under, despite raising millions of dollars, owing to the simple fact that they were unable to generate steady cash. While managing your business’s finances entails much more than understanding your the best way to avoid cash flow problems is cash flow, it’s a great place to start assessing your business’s financial standings. Read on to learn about cash flow, including the seven most common cash flow problems small businesses experience and how best to solve them.
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