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Why do businesses run out of cash?

Operating a small business can be stressful enough, but when you run low on cash, it can be frightening. So many things can impact your business cash flow, from increased competition, keeping up with technology, and managing your finances. It is not surprising that you may overlook something.

By avoiding the following common mistakes, you can avoid running out of cash and putting your company in financial jeopardy.

Overspending

Cutting down your current costs is the most important step you should take after running out of cash. Too often, business owners lose track of expenditures and receive a rude awakening at the end of the quarter when they realize their cash is gone. You may also neglect small changes in your expenses, such as an extra service charge from a supplier or an increase in a lease payment.

Any change, even small ones, can have an impact on your cash flow. Creating and sticking to a budget is the best way to make sure you are keeping within your expenditure ranges which will help you protect your cash.

Profit Margin Miscalculations

It is important that you use accurate information when determining your cost of goods in comparison to the final cost of sales. If the cost of goods is estimated too high, your profit margin may be too small to support a commercially viable company.

You want to be sure that your wholesale pricing is as accurate as possible and, if you find the cost of goods is too high, you may need to make changes. This could be a change in suppliers or how much you order at a time. The best thing is to ask a financial advisor to help you set up your profit margins in order to make sure they are strong enough to support the business for the long term.

Focusing on Sales and Not Invoicing

Although you want to work on lead generation and sales, you also need to make sure you are collecting from customers who have already purchased from you. Late and slow payments can have a devastating effect on your bottom line.

It is important to create a follow-up and debt recovery program that will keep your accounts receivable as low as possible. It is also recommended that you create a staggered invoicing system.

Invoice half your customers at the beginning of the month and the other half in the middle of the month. If you require 30-day payment, this will provide you with a steadier income stream throughout the month rather than running low as you wait for the next set of invoices to go out.

Rapid Growth

If your business is growing rapidly, it is possible you may see cash flow problems. This is usually temporary and may be caused by hiring new employees, increased marketing, or investments in production needs. If your cash runs too low, you may need to slow growth in order to balance your financial needs.

Not Watching Market Changes

There are some industries where the market changes rapidly, such as retail. Only companies that are quickly able to adapt to that change survive. If you notice cash shortfalls are occurring more and more often, it may be that your market is changing. This means you must make adjustments to meet that change. Failing to do so will cause low customer engagement and could result in clients heading to the competitors who have kept up with the market.

If you have noticed your business struggles with cash flow, you need to set up a business and financial plan that will keep your business running smoothly. If you don’t think you’re going to be able to do this on your own, don’t hesitate to reach out to a professional for help.

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