Shawn Bradley 
Cash flow is the net balance of cash that goes in and out of your business. It is the money you receive from sales, investments, royalties, or licensing agreements and the money you spend. Cash flow determines your business’s financial health. Problems arise when the money that goes in isn’t sufficient to cover the money that needs to go out. So whether you sort it out yourself, hire an expert or seek guidance through outsourced CFO services, here’s what you need to know.
Why Cash Flow Management Matters
Cash flow is a good metric to determine the financial health of any business, aiding in financial planning. When there is a good balance between inflow and outflow of cash, you’re able to optimize operational expenses.
Managing your cash flow also allows your finance officers to identify which areas of your business perform well, helping them decide where and how to spend resources.
Factors That Affect Business Cash Flow
Learning what can affect your cash flow can help you plan around or prevent it. Here are potential issues that could affect your cash flow.
Late Payments
Accounts receivable represent sales, but they haven’t been collected yet for whatever reason. Unpaid receivables are one of the most common causes of poor cash flow. When customers do not pay on time, you may have problems paying your vendors or employees on time.
When you have enough accounts receivable, and they’re left unchecked for quite some time, it will leave your business vulnerable to financial problems. These will go beyond unpaid vendors and employees; both will ultimately disrupt your operations, which in turn affects how you serve customers.
A corporate cash collection service provides your business with a convenient payment method. A collection service would have a network that allows your customers to pay for your goods or services on time. Outsourcing this part of your business also frees up your employees to focus on their core tasks instead of chasing after accounts receivable.
Excess Inventory
Inflation, competition, and market shifts influence buyer behavior. When consumers become pickier about the products they choose, what used to sell fast may end up languishing in warehouses.
Businesses that have too much stock of certain products have considerable capital tied up in inventory. Inventory that fails to move is lost revenue and profits. Even if you keep the goods until demand picks up again, your business still incurs costs with storage and maintenance.
With good inventory management, your business secures its bottom line. How do you better manage your inventory?
- Practice optimal order quantity.
- Use AI-powered inventory management to analyze data and identify patterns, forecasting future cash flows.
- Reduce inventory holding costs through cross-docking (i.e., products go from inbound to outbound transport)
- Implement inventory segmentation and prioritization to ensure that goods with high demand are always available.
Poor Credit Terms
Credit terms refer to the period your business has set for customers to pay for the goods or services they’ve acquired. Terms that are too strict or too generous can affect your cash flow.
You can implement a late deposit or payment penalty to encourage customers to pay on time. Offering a payment plan is another way to help customers meet their financial obligations. In all, it’s important to have an open discussion to retain customer loyalty while still ensuring payments are made.
Below-Market Standard Rates
Pricing strategy is a delicate balancing act. You want to offer your products or services at a price the market can afford. But you certainly want to make a considerable profit. You can’t use a price that’s too high because you’ll end up losing potential customers who are not willing to pay the price. Either strategy can affect your profitability and cash flow.
Using below-market standard rates may do more harm since it can reflect on your brand and result in low to no profits.
To implement the ideal pricing strategy, it’s important to have a deep understanding of your customer base. What are they willing to pay? How do they perceive your products or services? Once you have sufficient data, you can start to apply the right pricing strategy and ensure cash flow.
High Overhead Expenses
Office lease, utilities, travel, legal and accounting fees, and equipment are just some of the expenses that fall under overhead. These ongoing costs are essential to running the business. High overhead costs can quickly cut into your cash reserve.
The problem could also escalate if your company is expanding; expansion can help your business raise profits, but it also means spending more on overhead. You might need to hire more people to take on more projects and invest in new technology to improve operations.
How do you manage overhead costs as your business scales?
- Make sure you have real-time visibility on all expenses to control cash flow.
- Renegotiate better terms on services or find other cost-effective alternatives.
- Leverage cloud-based solutions to facilitate secure and efficient processes.
- Consider remote working arrangements for certain employees to eliminate the need for a bigger and pricier office space.
Cash flow problems are fixable. However, the problems must be identified early on to prevent bigger challenges for your business.
