How to improve and maintain your cash flow

One of the biggest factors that cause a negative cash flow is clients or customers not paying invoices or paying them late.

You may think that as long as the invoice is paid, even if it’s a few weeks late, it’s ok, but late payments will create an unhealthy cash flow cycle within the business. This is because while you wait for your clients to pay you, your internal expenses and bills add up that you have to pay.

As a small business, you likely need your invoices to be paid for you to be able to pay your expenses. This means you either have to dip into savings or your own personal funds to pay the costs of running the business.

Alternatively, you may decide to pay your suppliers, vendors, and other bills late, which can incur late fees and penalties, so you pay more than expected. This further exasperates your negative cash flow situation.

Businesses that are not profitable or make a low profit typically have cash flow problems. Your profit is the money you have left over after all business expenses and operating costs are paid, like staff salaries, utilities, rent, and inventory.

While each business is different, the average net profit for a small business is around 10%. Many factors will determine the profit, but keep in mind that a margin below 5% is considered too low and may be a sign that your business will have cash flow problems.

If your profit margins have been consistently low, it is a good idea to investigate the cause. Common reasons include the employees’ lack of productivity, sales and marketing issues, or problems with your logistics.

The amount you charge for your products or services affects your cash flow. Most consumers are price sensitive, and while they may be happy to pay a premium for excellent quality and superior service, there is a limit to how much they are willing to pay.

When your prices are too high, you will lose customers, but if they are too low, you will fail to generate enough revenue to keep the business going. The marketplace is dynamic, so you must keep up to date with your competitors’ offerings and their prices so that you have a benchmark for what you can charge.

Demand planning is a critical skill; investing in this can save your business from a negative cash flow. Many small business owners know that buying in bulk, whether raw materials or finished goods is cheaper as most suppliers reduce the cost per unit if you order more, but holding more stock than you need ties up cash.

If your inventory isn’t selling fast, you will probably have to pay for storage or warehousing fees, and depending on the item, it may become outdated so that people won’t buy it.

You may think you will benefit from a discount by purchasing large amounts of stock, but it’s better to be cautious and only buy the stock you need for a few months. As your business grows and you grasp trend movements, you can increase how much you order.