Every company knows that dipping into the red is a dangerous move. Making money is the most basic tenet of business. But cash flow problems crop up more often than you may think, for everyone from freshly hatched SMBs to established organizations with worksites around the world. In fact, 29 percent of startups fail as a direct result of a cash-flow crisis.
You want your business to go the distance. Consider these six ways businesses can avoid a cash-flow crisis and stay firmly in the black as they navigate their financial processes.
Stay Away from Bad Debt
When someone wants to give your company their money for your goods or services, it’s tempting to jump at the offer. After all, that’s why you sink so much time, energy and budget into attracting clients and customers. However, your company will need a credit control system to make sure that it’s doing business with buyers who can and will actually pony up the money they owe you. Depending on your industry, this may mean conducting credit checks before signing a contract with a client or asking for a partial deposit up front to show they’re serious about holding up their end of the deal.
Create Accurate Forecasts
Sure, business is booming right now. But what about next week? Next month? Next year? The art of forecasting is mightily important, whether you’re an ecommerce company ordering inventory for the upcoming holiday season or a manufacturer trying to anticipate demand. Every company has something they can—and should—forecast regularly. This is the only way you can build an accurate roadmap for what’s to come (one that avoids hazards like cash-flow crunches).
Anticipate Seasonal Fluctuations
Part of forecasting is knowing seasonal trends within your industry and specific line of work. If you treat July like November, you’ll be in for a harsh surprise when revenue is down and overhead costs are just the same. Harvard Business Review lays out three basic types of forecasting:
– Qualitative Techniques: Utilizes qualitative data like expert opinion plus information about special events and/or the past.
– Time Series Analysis: Analyzes patterns and changes within historical data.
– Causal Models: Examines relationships between elements in a system to determine cause and effect.
Automate Order-to-Cash Cycle
Your company sees what the customer doesn’t: A series of complicated steps, from collecting orders to processing payments, manufacturing products, shipping orders and customer service. If one thing goes awry in this order-to-cash cycle, your business could be looking at cash deficits or unnecessary expenditures. Automating these processes with tools like order management software can help identify problem spots, streamline processes and keep operational costs down.
Stay on Top of Billing
Small-town companies may have operated on credit and good faith in decades past, but you need a system in place to ensure that you’re paid in full and on time, every time. Sending out prompt invoices, following up on overdue payments and ensuring the legitimacy of payments are all necessary steps to ensure that you actually receive the cash your books say you should.
Don’t Forget About Taxes
Tax season is a doozy; don’t let it sneak up on you! As Entrepreneur writes, “Remember, if you don’t file your taxes or make an error, you could be subject to penalties, interest payments and even an audit from the IRS.” These bungles will only lead to more cash-flow issues, so it’s important to file taxes accurately before deadlines.
These represent just six ways to help your business avoid a cash-flow crisis, but they provide a foundation for keeping cash flow positive relative to expenditures.