Did you know that 20% of small businesses fail in their first year and 50% of small businesses fail in their fifth year? This puts small business owners at significant risk, and not just in their first year of business. Small and medium-sized businesses don’t have the deep pockets or backing that large enterprises do, which is why even short-term cash flow problems can sink a business with an otherwise promising future.
How can a business unexpectedly run out of cash?
There are a lot of different reasons why your business could suddenly run into liquidity issues, but let’s take a look at a few of the most common.
1. Unsustainable Growth
Surprisingly, too much success too quickly can wreak havoc on your finances. High demand for your products can overextend your ability to provide services, which means you need to build up your business’ infrastructure – more employees, tools, materials, and management support.
If, for example, a long-standing client suddenly wants to scale up their service by an order of magnitude, you might end up trying to scale your operations up part-way (as your budget allows), only to lose the client entirely because the service from your lagging infrastructure no longer meets their expectations. You won’t be able to recover the investment you made in the time you had planned, and your revenue is now even lower than before you made the investment.
2. Clients Who Pay Late
Every business owner is familiar with clients paying late. It’s so common that entire industries are built collecting those overdue debts. Unfortunately, most SMEs don’t have time to wait for collection agencies to do the work. Businesses need reliable revenue to cover operational costs. When a small business doesn’t get paid, things go downhill fast. Tools break and don’t get repaired, materials run out, payrolls fail and employees leave.
3. Sudden Loss Of Credit
Sometimes everything will be fine until you get a letter in the mail letting you know that your bank is closing your line of credit. This essentially pulls the safety net out from under your business. If you were counting on this facility to cover any expenses due to another issue (like a late payment from a client), find another backup quickly.
These issues pose massive risks for SMEs all over the world, and the most critical way to avoid them is by understanding and making use of the financial tools available to SMEs.
What can an SME do to avoid cash flow problems?
There are a variety of different financial arrangements that SMEs can make with business finance firms to protect themselves from these common cash flow problems:
1. Business Overdraft
This is a line of credit containing flexible payment options letting you withdraw money up to a pre-set limit when required and make deposits when your business receives payments. Many have flexible terms and competitive rates – speak to a business banker to find out more.
The threat of depleted cash flow is a concern for many business owners but having the right resources in place can keep you covered in just a few steps. If you take out a loan always ensure you are credit smart and have a plan around spending and repayment so you can continue to access capital into the future to strategically expand.
2. Utilise Bartercard
Bartercard members receive an interest-free line of credit which allows them to make purchases immediately upon joining the Bartercard network. This interest-free line of credit enables members to continue using the Bartercard network to make purchases even during times when their cash flow has slowed. This way, members can conserve their cash while always having access to the goods and services available through the Bartercard system.
If you’re looking for more tips on how to deal with change and other business-related matters, why not check out The 7 Habits of Highly Effective Small Business Owners – and work smarter, not harder on your business.