Whether it’s rent, utilities, equipment or salary -there are expenses, both small and large, to manage as part of the business. To support daily operations and potential business expansion, you should ensure that you have sufficient cash on hand to run your business. If you fail to keep track of your cash flow, it would be difficult to sustain a steady business operations in the long run. Since, anticipating times of tight cash flow can smoothen operations, here are 3 warning signs for when your company may be vulnerable to cash flow problems. Watch out and manage your cash flow before problems arise!
3 warning signs of potential cash flow problems
1. Large amount of outstanding invoices
Payment from customers are the main source of operating cash flow to a company offering goods or services. You need to have a stable source of income to finance your expenses. While it’s a nice gesture to offer customers an option to pay later or by installments, you have to consider the potential risk of such arrangement. What if customers do not repay on time? What if they default? Will it have a significant impact on your business operations?
If a large portion of your customers rely on deferred payment, you need to have enough cash coming in in the short-term to pay off recurring expenses. Even if your customers are credit worthy, you always have to consider the chance a customer potential bankruptcy or liquidation (knock on wood!), especially ones you have not yet established a long term relationship with. However small it may be, one cannot fully deny its possibility and detrimental impact. What may be helpful is to make sure that even if a percentage of your receivables default, you’re still able to operate normally through your cash reserves without any issues. The exact calculation for how much you should keep in reserve in preparation for uncollectible accounts depends on your risk tolerance and industry.
2. Too much debt
Borrowing can be a useful means of financing, especially at the early stage of your business where profits are not generated yet. It’s also useful when you want to invest in some larger projects or purchase some advanced equipment with the goal of generating more revenue in the future. But funding a company with only external borrowings may not be a good sign. It may point to inefficient use of funds and there may be additional expectations from your lenders. Is your company able to generate revenues that are proportional to operating costs? How do you plan on spending the loan acquired? Are you borrowing too much in new projects without generating your own operating cash flow? External borrowing can be both costly and risky. Heavy reliance on debt exhaust your company’s ability to obtain new loans when you really need it sometime in the future. Make use of these credit facilities wisely and make sure that you are still able to obtain new funds when contingencies arise.
3. Not managing your accounts payable
There is often a dilemma in handling accounts payable. On one hand, you want to repay as soon as possible to obtain discounts on early repayment and to build a stronger relationship with your suppliers. On the other hand, you may also want to defer repayment in order to keep more cash on hand in order to support your business operations. What both scenarios share in common is awareness of cash flow management. Before you can take any measures, you have to first be aware of the need to manage your accounts payable. So what measures should you take? Here is one suggestion. Join Reap! We allow businesses to pay with credit cards even if the other side does not accept cards. In this way, you can pay any expenses (rent, salaries, suppliers) on cards and obtain the benefits from early repayment while retaining cash for the time being.
Pay attention to the above symptoms and do regularly keep track of your company’s cash flow. Only by maintaining sufficient liquidity can a firm sustain in the long run!