Management, Hints and tips
5 ways that poor cash flow can damage your business – and how to prevent it
Posted on by Katie Hook
Estimated read time: 4 mins
“When it comes to money, ignorance is NOT bliss. What you don’t know CAN hurt you.” ― Sandra S. Simmons
If your small business cash flow is something which keeps you up at night, then you’re not alone. A survey from 2016 found that 54% of UK SME’s (small and medium-sized enterprises) cited cash flow as the biggest obstacle to their growth1. And with good reason because poor cash flow can cause a number of significant problems.
1) Inability to pay suppliers
If you can’t pay your suppliers, this can lead to poor business relationships and damage to your reputation. It may also impact your ability to meet your own deadlines and contractual obligations.
2) Late or unpaid debt repayments
Not paying your debts on time can impact your business credit score and your ability to get credit in the future. It could also negatively affect the rates you would be offered.
Should your inability to pay debts continue, you may face legal action or even insolvency.
3) Unable to buy new inventory
Poor cash flow can literally be a show stopper. If you can’t pay for new inventory, then your business might struggle to function.
4) Unpaid staff wages
No business owner wants to be put in a position where they can’t pay their own staff. Aside from the implications for your employees, you will also risk both reputational and resourcing difficulties.
5) Loss of contracts
Ultimately, if you’re unable to pay your suppliers, your staff or your debts – you could end up losing your contracts. If the loss to your reputation doesn’t do it, then your poor credit score might.
This may all seem rather gloomy, but there is a solution! You see, the majority of small business cash flow problems are caused by late payment of money owed. By taking some simple action to reduce the risk of your invoices being paid late, your cash flow worries will be significantly fewer and you can enjoy a good night’s sleep again!
Credit check clients before working with them
Your clients’ business credit report will give you an excellent indication of how likely they are to pay you on time. It will highlight any potential financial difficulties they might be having, as well as giving you an overview of their previous payment behaviour.
Set clear payment terms up front
Make sure your clients know and understand what is expected from them before any commitment is made. This can help to avoid any potential confusion or dispute down the line.
Maintain good business relationships
If you can build great relationships with your clients and your suppliers, then it will be much easier to negotiate better terms and to ensure that they pay you on time.
Sources: 1. Small Business