New business owners can often get caught out by the importance of cash flow. It’s one of those things that can be easy to overlook, yet running into cash flow difficulties can be extremely damaging to a business’s prospects. It’s hard to keep a business afloat when the incomings and outgoings are too close to one another.
In other words: cash flow troubles can lead to a whole bunch of unwanted complications that can, unfortunately, even end up in the business having to close its doors. Making enough sales makes having a healthy cash flow more straightforward, but it doesn’t offer complete protection.
In this post, we’re going to take a look at a few factors that can unexpectedly affect cash flow, as well as offer advice on how to avoid them.
Slow Paying Customers
A business might make a big order, but if they’re slow to pay the invoice that you send them, then you’ll be running the risk of falling into a difficult cash flow situation. Remember — making a sale doesn’t improve your cash flow; that only happens once the money is in your account.
Some customers will pay slowly. In fact, many customers will do this — or at least, you should expect that they will. You can encourage your customers to pay quickly by sending invoices promptly, offering an early payment discount, and making it as easy as possible for them to pay. Clearly stating your payment terms and any late charges that may apply can also help.
Poor Tax Management
Some businesses can be caught off guard by having to spend a small fortune, which will naturally have a huge impact on their cash flow. This happens when businesses don’t have a solid understanding of their tax obligations and when the money must be paid. Learning about the UK taxation year, including when you need to file and pay, can make it easier to plan for tax-related cash outflows. You’ll need to pay this money anyway — having a good understanding of when the cash will be leaving your account is key to ensuring that you don’t get caught out and aren’t stuck with paying thousands of pounds unexpectedly.
Overlooking Seasonal Fluctuations
In most cases, businesses have times of the year when they make more sales, and times of the year when they make fewer sales. Understanding when those periods are is key to maintaining your cash flow, since it’ll allow you to factor in the fact that you may have less money coming in than you usually do. It can be a good idea to build your company’s cash reserve when business is good, so that you have some breathing room during quieter periods.
Relying On One or Two Major Customers
Finally, relying on just a few customers for the bulk of your income can put you at risk of cash flow difficulties if one of them leaves. A customer who accounted for 40% of your revenue will be sorely missed if they suddenly drop you. When possible, look at spreading your revenue among as many customers as possible, and try to prevent one customer from being overly important.
