How to Spot Signs Of Cash Flow Problems
Now that tax season has finally come and gone, we can all breathe a sigh of relief.
All accountants are familiar with the lull that typically follows Tax Day. Clients have settled their taxes, and unless they’re self-employed or file quarterly, you might not hear from them for quite some time.
But, instead of simply letting business slow down after taxes are paid, this lull period provides the perfect opportunity to position yourself as a trusted advisor by offering to counsel your clients on something they struggle with all year round: cash flow management.
Recently, I stumbled across a report that said 29% of startups fail because they run out of cash. That’s no small number. Now that they’ve just paid their taxes and are even shorter on cash, some of your clients may be inching closer to becoming part of that statistic – particularly since 90% of businesses don’t have great visibility into their cash flow in the first place.
To become a cash flow advisor, you need to understand how to identify potential cash flow gaps and how to prevent them from occurring in the first place. You also need to know when a business should look for outside financing.
How to Identify Cash Flow Gaps
There are a number of signs that may indicate cash flow problems are on the horizon. Here some of the more common ones:
- Invoices are piling up. Businesses can’t expect to have any cash if their clients aren’t paying their bills. But, that’s the reality that many businesses face. A recent study revealed that 33% of businesses have invoices totaling at least 20% of their receivables that are more than 90 days overdue. When not enough money comes in, cash flow problems could be right around the corner.
- Expenses are increasing. Prices go up. Such is life. When businesses are hit by a lot of increased expenses at once – say when rent, Internet and the cost of supplies all go up – cash flow problems may very well materialize.
- Sales are slowing. Maybe, it’s a seasonal thing. Maybe, it’s related to the economy. Maybe, customers have simply moved on. Whatever the case may be, when sales slow, the cash river dries up.
Cash flow problems may also be looming when excessive short-term debt builds up (e.g., credit cards). This may also surface when businesses grow too quickly (e.g., opening up a new location and hiring new staff).
How to Prevent Cash Flow Gaps
In many cases, cash flow gaps can be prevented if you know what you’re dealing with. Businesses can prevent cash flow gaps by:
- Looking at their finances – Small business owners need to know how much money is in their bank account. They need to know how much money they owe and how much money others owe them. That’s something entrepreneurs and small business people like me look at every day. You need to have a constant thumb on the pulse of your finances.
- Working accounts payable properly. Businesses need to take advantage of every payment discount they can. They should also offer payment discounts to their clients to encourage prompt payments.
- Having great collection policies and procedures in place. Cash flow gaps can be prevented when a business changes its approach to invoicing. Instead of waiting until the end of the month to fire out a round of bills, send invoices out the moment work is completed. Companies also need to make it as easy as possible for their customers to pay them. They should accept as many payment options as they can.
Cash flow gaps can also be solved by raising prices, encouraging sales teams to upsell and cross-sell, and changing payment terms (e.g., working on retainer).
When to Seek Outside Financing
Sometimes, businesses may still face cash shortages even if they’re using every cash flow trick in the book. In these instances, it’s time to seek alternative financing.
There are a number of outside financing options available to business owners. They can try to get a loan through a bank, but that can be tricky. They can apply for a loan through the SBA, but that might take forever. They can get a working capital loan, but that can be expensive. The list goes on and on.
Those options are either time-consuming or costly, so I don’t really like them personally. When it comes to needing finances for my businesses, I’ve turned to an invoice-clearing service called Fundbox. It’s been a game-changer.
Fundbox allows you to clear outstanding invoices with a few clicks of the mouse or taps of the finger. Whenever there’s a shortfall on payroll or we need to buy some new technology, Fundbox is there – and quickly.
Here’s how it works: The service advances payments on outstanding invoices for a small fee. You then have 12 weeks to repay the advance, plus the fee. Fundbox is incredibly easy to use, and it connects to your accounting software, so it’s easy to manage, too.
I’ve been using Fundbox with all three of my companies, and I’ve been pleased with it to the point that I’m introducing the service to my clients who are looking at fast funding for receivables and things like that.
Now that tax season is in the rearview mirror, it’s the perfect time to offer advice on cash flow management to your clients. They will almost certainly be receptive. After all, cash does tend to get a little tight after you write a huge check to Uncle Sam.