Stopping the flow
No matter what stage your business is in, having trouble with cash flow is never a good thing. As we've written about before, cash is the life blood of any business, and just as blood needs to flow through your body, cash needs to flow through your business. If cash gets stuck somewhere, you're likely to have a business heart attack, which is why we've put together a few common cash flow issues small businesses face.
GROWING YOURSELF OUT OF BUSINESS
One of the biggest cash flow head scratchers is when a business is showing good top line revenue growth, but is still struggling to pay the bills every month. This is especially frustrating when the company has a profitable business model. How is a growing, profitable business struggling with cash flow?
The most common cause of this type of cash flow issue is that, while revenue is going up, so are expenses. And since many businesses realize costs before they realize revenue, the costs end up weighing down on the cash flow because you're having to pay upfront for sales that will be received in the future. A Line of Credit can be a good way to manage this type of cash flow issue.
While cash flow issues arising from rapid growth can be a good problem to have, high interest debt payments are most definitely not. A business can be operationally profitable, but if most of the leftover profit is eaten up with debt payments, then it can feel like your business is being slowly strangled. While debt (especially lines of credit) can be a great way to finance the growth of your business, you always want to make sure that you can service the full debt payment and maintain profitability.
Another common cash flow problem is when a small business owner has a bunch of expenses due at the same time of the month. As the graphic below shows, a company can be profitable at the end of the month and still hit cash crunches mid-month.
A great way to manage this type of cash flow issue is to simply spread payments throughout the month where possible. Obviously labor costs are usually the largest scheduled chunk payments, so if you can shift around debt payments, utilities, or other non-labor payments that will go a long way toward evening out your cash flow.
If you'd like to learn more about managing your cash flow, reach out to us for a free business evaluation.