When you started your small business, you probably weren’t instantly generating sales or revenue. Startup costs vary depending on your industry, but you probably had to lay out a fair amount of cash for things like securing your location, purchasing equipment and inventory, or raw materials.
As you got established, you probably watched your monthly expenses grow, just to keep your doors open. So then you start making sales—a lot of sales—and on paper, you appear to be profitable. On paper, you’re generating enough revenue to cover your expenses, and then some. But when you go to pay your bills, there’s a disconnect. You’re short.
The trouble here is cash.
In his article on the difference between cash and profit, Tim Berry (founder of Palo Alto Software, makers of LivePlan) says, “We are trained to think of business as sales minus costs and expenses, which is profits. [But] profitable companies go broke because they have all their money tied up in assets that can’t quickly be converted to cash, such as inventory money owed as accounts receivable from customers who haven’t paid old invoices.”
It is crucial that small business owners figure out the root cause of their cash flow challenges. Why? So they can get ahead of the situation before they have a crisis that threatens their business’s ability to survive.
Here are four common reasons you might be struggling, even though you’re profitable on paper.
1. The lack of planning
Sometimes you get lucky. Some businesses are so well connected and funded that they don’t have cash concerns. But most businesses do, and most businesses benefit from careful, meticulous, and strategic planning. Research shows that companies that do business planning grow 30 percent faster.
Your business plan should be a Lean Plan, meaning a short, useful tool that you review and revise regularly. Use a business plan review meeting each month to review your financials—how are your sales tracking against your sales forecast? How is your cash flow compared to what you thought it would be?
Make sure your plan is realistic and built on current and accurate information, and that you have created SMART goals and milestones to help you stay on track. Download a Lean Plan template to help you get started, or learn more about Lean Planning in this article.
2. Expanding too soon
One of the major reasons business fail to make profits is because they make the mistake of expanding their operations before they’re ready.
Slow yet steady expansion, on the other hand, can lead to better, more sustainable growth. By this, I don’t that mean that companies should postpone or repress their growth. However, businesses do need to ensure they’re able to meet increased customer demand in a timely manner, and without breaking down existing systems.
It’s back to the cash flow question: do you have enough cash to support an expansion.
If you’re looking at your financials and you’re not sure, look for some assistance from an experienced business mentor or advisor. SCORE offers a free business mentorship program across the U.S., and LivePlan also offers a directory of Expert Advisors who work with small businesses both remotely and locally to help them navigate major opportunities and challenges.
3. Poor inventory management
Typically, retail and ecommerce business owners buy large amounts of inventory with the goal of selling everything at a profit. However, if the products don’t sell as well or as quickly as you projected, you can find your profit margin in a downward spiral. You might find your products are losing value, or even becoming obsolete.
Businesses are then forced to either sell them at steep discounts or discard them, tying up large sums of money in all the unsold inventory.
There was a time when American retail giant Walmart had a hard time managing its stocks as inventory grew faster than sales. In 2013, Walmart reported losses amounting to US $3 billion. It announced lower earnings again earlier this year because of excess goods and disorganized storage spaces.
Poor inventory management can lead to shortages and overages, both of which can spell doom for a business’s profit margin. The problem of inventory imbalance is common and often underestimated. Businesses that don’t understand their sales patterns can easily make this mistake.
Businesses, regardless of their size, will do well to invest in inventory management software or a point of sale (POS) system to track their inventory. You can use a POS to generate detailed inventory reports, identify sales patterns and trends, and highlight the best and worst selling products. This way, business owners can track their best-selling items as well as the demand levels, and stock inventory accordingly, thereby incurring minimal to no losses.
4. Lackluster online presence
When Airbnb launched, the founders couldn’t even afford to pay rent. Today, however, the story is completely different. Now, they report that they have 6 million listings worldwide, and that they’ve facilitated more than 500 million stays and a total valuation of $35 billion. A large part of this achievement comes from Airbnb’s business model, supported by their solid online presence and digital marketing strategies.
If your small business’s website is at the bottom of your list, or if you’re running your entire online presence through Facebook, take some time to get it right—even if your business is brick and mortar.
This article gives a great list of tips for optimizing your website. It doesn’t have to be complicated or terribly time-consuming.
Remember to update your social media and website content on a regular basis to keep it current. You can use these platforms to engage with customers, showcase your offerings, and announce new releases, special offers, promotional contests, and business milestones.
Ask your customers to leave reviews on your website, social accounts, or even review sites. When potential customers view these online reviews, it will be easier for them to trust your brand.
Don’t let cash flow challenges crush your business
Whether you’re just starting out or a seasoned small business owner, the information shared in this article will help you take charge of your business’s bottom line and steer your venture toward success.