Forbes tells us that on average, a massive 90% of SMEs will fail. Only around 50% of the new businesses that crop up in make it to their fifth year, according to SmallBiztrends.
What’s going on with these statistics? What is the underlying message? Those who have “been there and done that” will probably tell you that it has a lot to do with how the business has handled its cash flow. Cash flow is undoubtedly responsible for a large proportion of business failures across the globe.
What causes cash flow problems? There are five common cash flow mistakes that most new SMEs tend to make. Here they are:
1. Being over-zealous when predicting future sales.
It’s common for new business owners to get over excited about the possible success of their business and this often leads to incorrectly predicting future sales. This then leads to spending valuable cash flow on extra stock. And then reality strikes when the stock doesn’t sell as quickly as they had hoped. Err on the side of caution when predicting sales figures. It’s better to run out of stock than to be stuck with piles of stock that you cannot sell quickly.
2. Forking out cash when trying to force growth.
You might be wondering how on earth a business can try to force growth. It’s quite simple actually. When a new business starts dabbling with say, paid advertising, it might work. Think of social media adverts. The success of the advertising might be exciting and thus spurs the business owner on to thinking that increasing the amount spent on advertising will increase the total of sales. They then start funneling money into paid advertising only to find that the response is the same as it was with the smaller advertising spend. This means the money is wasted. That’s forced growth for you. It’s a sure fire way to eat into your much-needed cash flow and leave you in a financial pickle. It is best to let your business grow slowly and steadily.
3. Having zero cash as reserve funds.
Many SMEs make the mistake of using all of their available funds to grow or develop a certain part of their business. This leads to the business being in dire straits when cash is needed to buy more stock, pay for services, and so on. This can be absolutely crippling to some businesses and even lead to their downfall. If you want to start a new project or develop a certain aspect of your business, it is a good idea to apply for short term loans for cash flow instead of dipping into your existing funds. By applying for an unsecured, short-term loan, you can get the cash you need within 24 hours, with low interest attached, and easy repayment terms. This route is the best way to avoid future cash flow problems.
4. Having a wishy-washy budget.
Budgets are vitally important. If you don’t know what your business is spending and what it can actually afford to spend, you are soon going to find yourself in trouble. Many new companies fail to draw up a realistic budget and end up spending money that they don’t actually have. Budgets help to ensure that business spending is kept on track and that there’s financial discipline and responsibility intact.
5. Slacking off with chasing payments.
One of the biggest mistakes that new SMEs seem to make is not chasing payments from customers. Credit Safe released a report that in 2018 that showed SMEs in the UK had to write off £738.7 million ($960 million) to bad debt, in the first three months of the year alone. That’s a lot of money that just been “impossible” to collect from customers. If a customer doesn’t have to pay immediately for goods and services, the business absolutely must have a system in place to track late payments. Business owners aren’t persistent enough in calling customers and demanding payment. The later a customer’s payments are, the less cash flow the business has to work with — and this leads to business failure.
If you are starting up a new business and want to ensure that you always have a healthy cash flow to rely on, make sure that you are careful with future sales predictions, hold off on trying to force growth, look into apply for short term loans for cash flow, set a strict budget in place, and are dedicated to chasing customers for payments. If you do all of this, your cash flow should survive the possible risks! Good luck.
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