Published: February 28th, 2017; By: Judi Hughes
No matter the size of the company, there will be a time that you run out of money. In his book ‘Screw It, Let’s Do It: Lessons in Life’, Richard Branson tells the story of having to sell Virgin Music to EMI for a billion dollars to keep Virgin Air afloat; that is $1,000,000,000!
There are many reasons your business might run short of cash. For some it might be a regular occurrence at the end of the month when bills are due but the receivables aren’t in yet. For others, your business might become cash challenged when large unexpected expenses occur. Why does your business run out of money and what can you do about it?
Here are seven reasons with suggested solutions:
- Customers consistently pay late: Implement incentives for timely payment. Offer a 2% discount for payment within 10 days. Discourage late payment with interest charges for late payment. Accept payment by credit card; many businesses love paying by credit card to collect points.
- Invoicing not a priority: Never allow invoicing to be late! If you ship products; invoice as soon as the product is shipped. If you deliver recurring monthly services; invoice at the first of every month. Always make invoicing a priority.
- Extended payment terms: Always include a reasonable percentage of payment at signing of the contract and include partial payments at milestone dates in your payment terms.
- Operating Expenses are more than your Revenue: This imbalance leads you toward bankruptcy. You must act quickly and act aggressively. Don’t think it will correct itself. It will not. It will only get worse if you don’t deal with it. Cut expenses NOW. And, launch a laser focused sales campaign to immediately generate revenue.
- Charging ongoing expenses to your credit cards: This is dangerous; expenses build up easily and are ignored until the statement comes in. Then you need to scramble to find the money. Either pay your credit card at the time of purchase or pay your credit card weekly to avoid growing a balance you cannot pay off at the end of the month.
- Spending government remittances: It is a common mistake to spend the money that should be put aside for known large quarterly or annual government remittances. We collect it on behalf of the government but instead of setting it aside, we use the money on other things. It is a deadly cycle. Set up a special account and every time an invoice is paid take the HST amount and deposit it into the special account.
- Normal ebb and flow of business cycles will also cause cash shortages. If payroll is paid every 2 weeks; a couple of months in a year there will be 3 pay periods. This can cause a cash flow blip. Consider changing pay periods to twice a month to even the flow. If you invoice monthly, consider invoicing twice a month to shorten the cash-in timeline.