Cash flow fluctuations can make it tough for entrepreneurs to keep their business finances under control. Ultimately, your cash flow can vary for a variety of reasons. As a business owner, your priority is to understand the triggers for high and low flow. Indeed, the better you understand those, the easier it is to take action and reduce uncertainty.
A healthy cash flow can help with day-to-day expenses and operations. Contrary to common belief, your cash flow and your profit are two different entities that can both affect the company’s survival. Lack of profit is the most commonly mentioned cause of business collapse. But fluctuating cash flow could dramatically affect your finances, leading to the inability to pay invoices on time, invest in new opportunities, and recover your credit score. Maintaining a healthy cash flow requires a proactive strategy that can identify and manage risks:
- Seeking new clients and projects
- Accurate work and invoice forecast
- Growth investments
But beware of these frequently overlooked risks that can take a toll on your cash flow:
Ineffective payment terms
What are the right payment terms for your business? There is, unfortunately, no right or wrong answer. It will depend entirely on your financial health and your clients. For a lot of small businesses, it may be tempting to match corporates’ generous payment terms, such as 60 or 90 days payments or even monthly payment intervals. However, it can delay cost recovery and leave the company facing incoming invoices with low or negative cash flow. Therefore, you may want to set payment terms that will preserve your need for immediate cash. In the meantime, it can be helpful to sell annuities so you can get cash for annuity payments and protect your cash flow.
Inadequate technology
The pandemic has taught business owners to seek digital and modern technology for day-to-day operations. Unfortunately, digitizing your activities comes at a high risk. Indeed, companies have been forced to transform their technology rapidly and on a reduced budget. Therefore, you might find that your chosen solutions can increase security risks, affect productivity, or even make you vulnerable to competitors. Failing to invest in the right tech for your business can increase operational costs through productivity loss, work quality impairments, and customer loss.
High turnover rate
Remote work options and the growing need for specialist talent have created a unique employment market where professional skills are high in demand and volatile. Employees are prone to quit and move to the next opportunity fast. As a result, businesses could face a high turnover rate. You may assume that employees are easy to replace. However, employee turnover can drive your costs up, involving recruitment and training costs. According to the American Center for Progress, replacing a mid-level employee costs around 20% annual salary and an executive-level employee over 200% annual salary. Additionally, it can also damage your cash flow, as employee turnover can decrease productivity, team morale, input quality, and customer satisfaction. As a result, the business may have lower cash flow without necessarily reducing expenses.
Cash flow is the blood of a company, keeping it operational by fueling investments and managing invoices. Unfortunately, more and more businesses fail to identify obstacles in their affairs that can wound the cash flow. Just as blood loss can weaken the body and damage organ functions, a negative cash flow can devastate the business’s health.
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