Protecting Your Business from Bankruptcy: 5 Tips for Small Businesses to Avoid Common Cash Flow Mistakes

By Bibby Financial Services

25 Jun 2018

Small business owners are often hyper-focused on the aspects of business that make their companies unique and successful. Whether this means a product focus, unmatched customer service or innovation, it also doesn’t leave enough hours in the day to focus the same level of attention on company finance. Many successful small businesses encounter financial difficulties because of unforeseen circumstances that may or may not include issues with their products, sales or customers. Experienced business owners will tell you that common company finance issues are easily avoided with some planning and by implementing creative and flexible funding solutions.

Here are 5 tips that small businesses can take today to ensure financial stability now and in the future: 

1. Focus first on cash flow and spending, second on profit.

Though this may seem like odd advice, it does not mean to ignore or discount profit considerations. Profit should always be in consideration but it should not be the sole determining factor for business decisions. Profitable businesses can fall into difficult situations that are taxing on the company’s finances like running out of cash to expand, even with substantial margins and full order books.

2. Understand break-even points for new equipment or new expenses the business takes on.

Understanding the break-even analysis for a large materials order, equipment upgrade 
or capacity expansion allows your business to plan for cash flow management and not experience an unforeseen ‘bottleneck’ at payroll time or when making routine payments to suppliers. Flexible funding solutions such as asset based lending can also be used to help finance inventory, materials or equipment without impacting cash flow.

3. Use professional accountants and accounting services.    

Performing credit checks on clients before offering terms, following invoice best practices that ensure terms are easily enforceable and making collections calls should not be someone’s ‘extra hat’. Your business should have a professional accountant or CFO that handles the company finances and analyzes the cash flow for your business. Back-office services like credit checks and invoicing are often handled by accounting services firms or by alternative banking partners who provide flexible funding solutions like factoring or asset based lending.

4. Maintain a cash reserve.

Although this sounds intuitive, it isn’t always a simple task. When purchasing 
opportunities or large orders with extended payment terms present themselves, businesses often make short-term decisions that don’t take into account important long-term calculations. Will filling this large order reduce available business funds until payment is received? Will taking advantage of a supplier discount make it difficult to make payroll? These considerations are important. To reduce these risks, flexible funding solutions exist. Factoring services allow businesses to turn over collections and invoice responsibilities to a funding partner for some or all orders involving payment terms, getting a large portion of the invoice cash value immediately. Asset based lending allows equipment, inventory, materials, land or any other asset to be used as collateral for a flexible line of credit to augment business cash flow.

5. Have a flexible funding solution in place before you need cash. 

Large invoices with long payment terms could disrupt your business just as much as unforeseen financial demands like equipment failure. Searching for cash when you are already in a cash crisis is foreseeably one of the worst situations to be in. Traditional lending services are typically a poor fit and ‘short-term’ business cash services offer interest rates that can cripple a business in the long term. Having a relationship with an alternative banking provider ensures that you have a flexible funding solution in place when your business needs cash instead of trying to find funding while in a bind. Factoring services allow cash to flow from invoices without creating an additional payment that has to be serviced.

Whether you’re a new startup or an established business, there will likely come a point in time that you will encounter cash flow challenges, especially during times of growth. Knowing about the diverse financing options that exist and having a plan in place before you need it key to avoiding a cash flow crisis.

 

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