Many business owners start with a great idea, and they put their capital into establishing and growing their business. At the start, everything seems to go well, with new customers flowing through the doors and demand rising. As business continues to grow, more money needs to be invested for continued growth. More customers mean more inventory, more staff, more training… more of many things.
With this growth, business managers are then forced to choose between storing cash for a rainy day and investing for growth. It is often a gamble, and the worst outcome is when a business invests and then – for some unforeseen reason – business weakens and money dries up.
The business is now struggling to find enough funds to pay their rent, payroll, suppliers and all the other things that a business requires to stay operational. A sudden, unexpected cash flow crisis can kill a business before it ever gets established.
How can I anticipate cash flow problems?
But a cash flow crisis doesn’t have to take you by surprise. Understanding the warning signs of a potential cash flow problem and better planning out of your working capital on hand can help you prepare for the tough times and weather the storm successfully.
Here are five warning signs of an upcoming working capital crunch that you should heed to avoid a cash flow crisis:
- Waiting for the big payments
- Too many delayed receivables
- Losing out on discounts
- Misuse of short-term debt
- Market and seasonal fluctuations
One of the first warning signs of a potential cash flow crisis is the heavy reliance on payments from “big” clients to meet operating expenses. If you find yourself depending on that one big client to keep the lights on every month, you’re setting yourself up to fail. Why? Because other businesses could have cash flow problems too. If the customer you’re counting on defaults on their payment, you could find yourself left high and dry. Of course, protecting yourself from such over-reliance on your big customers is easy if you have an established cash reserve, but most small businesses end up using additional cash to fuel growth, resulting in insufficient cash reserves to weather such crises.
2. Too many delayed receivables
Waiting on a big payday from a single client may be dangerous, but slow paying customers can come in all sizes.
Most businesses are established based on a simple business plan - you provide your customers with goods or services, and you get paid. In the real world, however, the fact that you’re supposed to get paid doesn’t mean you do… or at least not right away, with 81% of all SMEs facing finance-related issues experiencing delayed payments from their customers. But what if you need that money to continue providing those goods or services? When your books are filled with receivables that aren’t being paid steadily, an upcoming cash flow crisis may be on the horizon.
3. Losing out on discounts
When your customers aren’t paying you on time, it can be difficult to meet your own obligations as quickly as you might like. If you find yourself paying your own bills slowly, you may be on the edge of a cash flow crisis. What’s more, if you’re paying your bills late you are losing out on discounts that most vendors provide to encourage you to pay early.
Many companies, especially supplier and vendors, offer discounts for early or on-time payments. Even if that discount is a small percentage of your bill, this small percentage will add up over time. Having cash on hand allows you to pay your own suppliers on time, meaning you are leveraging your timeliness and saving money. If you never see these discounts, you’re not just losing money. You can also take it as a warning sign that your cash flow isn’t as stable as you might wish.
4. Misuse of short-term debt
Small loans and other lines of credit can be a big help in establishing a business. In fact, it’s almost impossible to start a business today without the help of both short and long-term lenders. One danger lies in not having a large enough credit line to get you over a cash flow crisis hump. Another is not knowing where and how to access short term loans, or how to use them. CardUp gives you easy access to short term credit and allows you to pay vendors with your credit card even if they don’t take them. You’ll have up to 58 days of interest-free, short-term credit to manage cash flow.
5. Market and seasonal fluctuations
You start your business based on a great idea. The goods or services you provide are in high demand, and it was easy to jump in with both feet to ramp up production and meet expected demand. Then the market starts to fluctuate, and you find yourself with too much inventory as sales begin to slow down. The problem, of course, is that your on-hand working capital are now tied up in inventory instead of protecting you from what is probably just a temporary downturn. You could find yourself in a cash flow crisis that threatens to shut your doors before the market has a chance to rebound.
A cash flow crisis can be devastating to a new business without established cash reserves. New businesses fail every day because owners get taken by surprise and have no proper plan to see them through. Understanding the warning signs of a potential working capital crisis can give you the opportunity to make the moves necessary to keep your doors open today and provide the opportunity to succeed tomorrow.
A solution to a cash flow crisis
There are easy solutions to cash flow issues your business is facing. One such solution is to utilise a payments platform like CardUp to tap on your pre-approved – and most of the time under-utilised – credit on your credit cards. By being able to use your credit card for payments that do not accept cards, you can then free up the cash you have on hand for other purposes, such as inventory costs for a seasonal demand, or to be reinvested for growth.
Furthermore, this credit is interest-free for up to 58 days, until your next credit card bill is due. This allows your business to ease cash flow issues and better manage working capital.