Many African small businesses struggle to survive because of cash flow problems. Not enough money is coming into the business to pay the bills. Or, too much money is leaving the business too fast and you don’t know how to deal with that problem.
Last week, we talked about cash flow and why it is the most important thing for African small and medium businesses. It is the most important thing because lack of cash is the number one reason why businesses fail. It is even possible for your business to be making a profit and still go bankrupt because of cash flow problems.
Let’s look at some of the most common cash flow problems and how to deal with them.
Not keeping good business records
If you do not keep good business records, I guarantee you that your business will not succeed. People fear accounting, but basic business management is actually easy to do. I have explained how to you this in my previous blog posts, so I will not go into detail now. However, if you want to learn more, these are the key steps that you need to consider:
- Record keeping 101 to make sure that you are on top of everything that is coming into your business and that is leaving your business
- Having a good sales forecast to be able to see how your business is doing
- Having a good understanding of all your expenses, both your business and personal expenses
- Understanding if you are making a profit on the products you are selling and if not, what action to take
- Knowing whether, at the end of the day, your business is making a profit
- How to create a business budget so that you will be fully in control of your business
Cash flow problems due to lack of financial reserves
Financial reserves will help your business deal with unexpected situations. If you have financial reserves, you can use the money for emergencies. If there are no emergencies, you can also use this money to invest in your business.
The good news is that it is not hard to start building financial reserves. Even if you only have a small amount per week that you are able to save. The most important thing to start saving today.
Giving credit to customers can cause cash flow problems
When you give credit to customers, you need to be sure that your business is making enough money to cover all your expenses until the day the customer pays. So, for example if your customer takes 1 month to pay you, you should have enough money in your account to cover all expenses as well as do any purchasing of supplies or inventory.
If your business depends on money coming in regularly, it is better to look for ways to encourage customers to pay you faster. One approach that you can try is to give discounts to your customers if they pay you faster. This is an incentive for them to save money and will help you get your money faster. For example, give customers a 10 percent discount if they pay you on the spot and give a 5% discount if they pay within one week. Of course, the smart thing for you to do is to increase your price by 10% so that – if your customer pays you on the spot, you will not lose any money.
Bad cash flow forecasting
You cash flow forecasting will tell you when money is coming into your business and when money will leave your business.
All business owners should keep good records of what is happening in their business. It will allow you to fully understand your business. But most importantly, it will help you to anticipate. You will have less stress because you will be able to see what is happening even before it happens. If you see something starting to go wrong, you will be able to make the necessary adjustments in time.
For example, if your cash flow forecasting tells you that next month you will have less money coming in as compared to what is going out, your strategy may be to do additional marketing to increase your sales. Or, you may decide to cut certain costs while you wait for more money to come in. (But make sure that your customers remain satisfied!)
If you have just started your business, it can be hard to know how much you will sell, what expenses you will have and when money will be coming in. In this case, I advise you to guess. And then monitor your business data carefully and make adjustments as needed. After some months, you will gain a good understanding of your business and be able to start managing your business better.
Low profits due to bad pricing
Are you making a profit on all the products you are selling? If the price you are charging is too low, the gross profit that your business is making will not be enough to cover your business expenses. It means that you need to find a way to increase your prices or reduce your expenses.
If you want to know how to calculate your gross profit, check out this post.
If you say that there is no way for you to increase your prices, I advise you to reconsider what you are selling. Most likely, you are trying to compete on price. This is not a good long term business strategy unless you are a big company and you have huge financial reserves. It will be better for your business to consider selling products that have a higher price.
Cash flow problems caused by lack of sales
Another reason why you may be facing cash flow problems is because you are not selling enough products or services. Any time incoming money slows down, your cash flow suffers. You need to find out what is causing the problem and then take action to resolve it.
First, check externally. Is the market fluctuating and are your competitors experiencing the same problems? Do you have a seasonal business and is this the low season? Are people saving their money because there will soon be a big national holiday that they will be spending money on? Then consider what strategy you can try to deal with this. Can you add new products? Can you do certain marketing promotions? Or is it time for you to consider diversification so that your business will not only depend on one source of income?
Secondly, check internally. What results are you seeing from your marketing? Do you need to adjust your online marketing? Did you bring in new products to replace the products you used to sell? Have you been getting complaints from customers about products, and if yes, have you addressed the issue?
Fast business growth
Fast business growth is a wonderful thing. But if your business grows too fast, it can cause problems with your cash flow. To the extent that you can be growing very fast and still go bankrupt. Why? When your business is growing fast, you need to invest money but you also have to wait for some time before you start seeing profits.
As your business grows, you will be spending more money to run the business. Your overhead expenses may increase, your will need to hire more staff, and you may have to lease or buy equipment. Or, you may need to buy more products to keep in stock.
If you are experiencing fast business growth and dealing with cash flow issues, first of all, keep your expenses under control and cut as much as possible without damaging your growth. For example, do not hire any new staff unless absolutely necessary.
Spending too much money
The fastest way to cause cash flow problems in your business is to spend too much money. This is why you need to know exactly how much money is coming into your business and how much is going out. Study your expenses to know what your biggest expenses are. Pay particular attention to your overhead costs like rent, electricity, phone & data bills. Then look for ways to reduce costs.
Make sure to maintain customer satisfaction by taking the points in this other post I wrote into consideration. Also look for ways to generate more money. For example, consider renting out part of your business space to other entrepreneurs. Or, if you have large inventory that is not moving fast, sell it at a lower stock to get rid of it and bring in some money. After that, make sure to only buy products that sell well.