Many business owners start with a great idea, and they put their capital into establishing and growing their business.
More customers mean more inventory, more staff, more training… more of many things.
With this growth, business managers are then forced to choose between storing cash for a rainy day and investing for growth. It is often a gamble, and the worst outcome is when a business invests and then – for some unforeseen reason – business weakens and money dries up.
But a cash flow crisis doesn’t have to take you by surprise. Understanding the warning signs of a potential cash flow problem and better planning out your working capital on hand can help you prepare for the tough times and weather the storm successfully.
[rml_read_more]
Sign 1. Waiting for the big payments
One of the first warning signs of a potential cash flow crisis is the heavy reliance on payments from “big” clients to meet operating expenses. If you find yourself depending on that one big client to keep the lights on every month, you’re setting yourself up to fail. Why? Because other businesses could have cash flow problems too. If the customer you’re counting on defaults on their payment, you could find yourself left high and dry. Of course, protecting yourself from such over-reliance on your big customers is easy if you have an established cash reserve, but most SMEs businesses end up using additional cash to fuel growth, resulting in insufficient cash reserves to weather such crises.
Suggestion: The first thing is right is important, often big projects or big clients are boarded out of anxiety to increase credentials and in the majority of cases with squiss margins and no control on recoveries. Of Course, such projects are required but not at the cost of disturbing your routine business, here largely people make mistakes and disturb the existing cycle. Now the question is what is the alternative, evaluate the project while bidding on practical grounds, anticipate unforeseen and create a backup. DO NOT DISTURB OTHER BUSINESS LINES. I know we don’t do it in routine, but that is ideal. As an example, I know an entrepreneur who negotiates such projects with his vendors on back to back credit lines
Sign 2. Too many delayed receivables
Waiting on a big payday from a single client may be dangerous, but slow-paying customers can come in all sizes.
Suggestion: Normally customers pay based on stiffness in follow-up, people who follow up more are paid faster. Also, ambiguity in rates, completion of service, and mismatches are also excuses to defer payments. Many organizations have receivable as a separate department whose mandate is recoveries which works effectively, Although some people may not agree due to their bitter experience, I am sure all will agree that it is depended on the quality of the person in recoveries
Sign 3. Misuse of short-term debt
One danger lies in not having a large enough credit line to get you over a cash flow crisis hump. Another is not knowing where and how to access short-term loans, or how to use them.
Of Course, having access to short-term funds is a separate matter but once you have purpose-based short-term funds, infuse them with a mandate to repay once the purpose is achieved. Don’t make it a part of the system and use it long-term.
Sign 4. Market and seasonal fluctuations
You start your business based on a great idea. The goods or services you provide are in high demand, and it is easy to jump in with both feet to ramp up production and meet expected demand. Then the market starts to fluctuate, and you find yourself with too much inventory as sales begin to slow down.
Suggestion: We come in this situation every day in the stock market, traders work with stop loss and investors track the market closely and less volume in the script is a sign of downturn and time to liquidate. In both cases two actions are common to track and liquidate and one who gets emotionally attached becomes a long-term investor, the same principle applies here.
A cash flow crisis can be devastating to a new business without established cash reserves. New businesses fail every day because the owners get taken by surprise and have no proper plan to see them through. Understanding the warning signs of a potential working capital crisis can give you the opportunity to make the moves necessary to keep your doors open today and provide the opportunity to succeed tomorrow.
In case you require any guidance you can connect to us who is a call away from you….
