Cash flow problems facing small companies
Fundamentally, it is considered impractical for small business proprietors to map out the exact cash flow of the business. Nonetheless, by focusing on the basic causes of cash flow problems, business owners have the ability to lower the possibility of cash crisis occurrence. The big three elements of cash management problems affecting small businesses are inventory, receivabl, and account payable. These three crucial elements are the primary indicators of an organization cash flow. For instance, when a company receivable balance is increasing, this means that its cash balance is most likely declining. Similarly, if the inventory balances and accounts payable are increasing faster compared to sales, it is an indication that the company is facing mounting pressure in its cash flow management.
A desired cash management guideline entails accelerating the company's receivables to acquire cash quickly, paying expenses in a moderate manner (without interfering with the company's credit score), and sustaining an optimal level of inventory. The big three cash management components combine to form a company's cash conversion cycle. This cycle can be defined as the period required changing inventory and payable accounts into sales and receivable accounts and eventually going back to cash. Cash conversion cycle of a company equals the addition of day's inventory outstanding and days' sales outstanding (daily payable outstanding). Essentially, an organization's cash conversion cycle is negative; that is, it processes its inventory faster and collects payments from its clients before settling payments of its vendors and suppliers.
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Solutions for managing cash flow problems in small businesses
Almost all small businesses have the potential of improving their cash position. However, to achieve this goal, the company must conduct an objective evaluation of its financial policies to identify inefficiency in its cash flow. By adopting the following methods, business owners can generate maximum profit depending on the pool of cash available in the company.
I) Bartering
Like the ancient barter trade, this is the exchange of goods and services for the same instead of cash. This can be considered as an effective way for small businesses to conserve cash. Despite being an ancient method of trading, it has regained popularity over the last few years. Bartering is often applied by bootstrapping entrepreneurs to finance their businesses and most trade equity in their businesses for crucial services like legal accounting and web design. In addition to saving cash, entrepreneurs using barter can convert slow-moving inventory into much-required products or services. Purchasing goods and services through this method provides an opportunity for a built-in discount. Even though the company receives credit on the retail price of the products they sell, the factual cost to the business is low, and it is largely dependable on the company's gross profit margin.
ii) Trimming overhead expenses
High operating costs can cripple a small business cash supply, and simple saving measures can save a large amount of money. Business owners can reduce overhead expenses through various ways, some include, requesting for discounts, conducting periodic expense audits, negotiate fixed loan payments to match with the cash flow sequence of the business, developing an internal security system, building a cash cushion and investing surplus cash. All these cost-saving measures are fundamental in the existence of business since constant cash flow ensure companies' activities run smoothly.
iii) Controlling employees' theft
Since small businesses mostly do not keep financial and control procedures that big companies adopt, they are susceptible to employee theft. Small businesses are mostly affected by employee theft, especially if the employee is a long-serving employee because they are aware of the company's weaknesses. Conversely, small business owners can adopt the following precautionary measures to avoid this incidence from happening. They include screening potential employees thoroughly to weed out prospective criminals before employing them and closely monitoring inventory. Failure to update and observe accurate inventory records usually provides a platform for employees to steal from the business.
Reference
Norman M. Scarborough, Jeffry Cornwall (2016). “Essential of Entrepreneurship and Small Business Management” , Eighth Edition
