What Causes Cash Flow Problems In A New Business?
When you first start a new business, you will probably hear a lot of scary statistics about the number of companies that fold within the first year. Some of those statistics will be exaggerated, but it is true that the first few years are a dangerous time and there is a big possibility that you won’t make it. The main reason that businesses fail so early on is that they run out of cash. When you start to experience cash flow issues, you have to act fast and do something about it before the business folds, but that can be tough. Often, you won’t be able to come back from it, so it’s more important that you avoid cash flow problems in the first place. If you are going to do that, you need to understand why they arise in the first place. These are some of the most common reasons that new businesses have cash flow issues.
Source – Pixabay CCO License
Overspending On Initial Costs
When you first start the business, you will only have a limited amount of funds, whether that’s money from investors or money that you have saved up and borrowed yourself. That finite amount of money needs to cover your initial setup costs and cover your overheads until you start making enough to break even. A lot of businesses underestimate how long it can take for them to break even and they assume that they’ll be earning enough to cover their overheads in no time, so they are reckless with their startup money. Often, people end up spending way more than they need to on renting an office space and furnishing it, or buying lots of expensive equipment. They waste all of their money and then a few months down the line, when they still haven’t managed to break even, their bank accounts dry up. That’s why it’s so important that you find ways to cut back on startup costs and get by on the bare minimum until you start bringing in more money.
If you’re expecting all of your customers to pay on time, you’re in for a big surprise. People hate to part with their cash and every now and again, you’ll get a customer that is really difficult about it. Having to chase up invoices and getting paid late can cause you some serious cash flow issues, so it’s always sensible to use an invoice factoring service. You may be thinking, what is factoring? Essentially, the invoice factoring company buys the debt from you. They will pay you 90 percent of the invoice right away and then collect from the customer. The final 10 percent will be paid once the customer pays them. That way, you get paid right away every time.
Buying Too Much Stock
It’s important that you manage your stock levels well because you don’t want to let your customers down. But a lot of new businesses overestimate just how successful they are going to be and they buy a lot more stock than they need. If you do that, all of your money is tied up in that stock and if you can’t sell it, you will run into problems. You need to invest in automated stock management software so you can accurately monitor stock levels and order new stock when needed, without over ordering.
These are some of the biggest pitfalls to watch out for, but they are not the only causes of cash flow issues, so make sure to keep a close eye on your business finances.