Why Is Cash Flow A Leading Cause Of Small Business Failure?

Why Is Cash Flow A Leading Cause Of Small Business Failure?

Small businesses are an integral part of any growing and flourishing economy. In India, there are about 42.5 million small business enterprises, including both registered and unregistered ones. However, a significant fraction of those enterprises does not even survive the first year of setting into operations. Analysts attribute a lack of cash flow management as one of the leading causes behind that. 

What Is Cash Flow And Why Is It Important?

Cash flow refers to the net inflow and outflow of cash and cash equivalents in and out of your enterprise. The ability to balance this factor determines an organisation’s survival. It is primarily because a business will not be able to maintain its operations efficiently without sufficient cash. 

Now, while several small business owners regard profitability and positive cash flow as the same thing, however, they are not. Ensuring proper cash flow management rather than focussing on profit is often more significant for small-scale enterprises. The following example explains it further.

Suppose, ABC Pvt. Ltd. sold goods worth Rs. 2 lakh in August. It also recorded expenses like employees’ salary, payments to suppliers, and other petty expenses, amounting to Rs. 1.5 lakh. Of the total sale, however, Rs. 1 lakh is on credit, which they are not due to receive until the end of September.

Thus, the financial statements represented profitability at Rs. 50,000 for the month of August. However, in terms of net cash flow, they only received Rs. 1 lakh against an outflow of Rs. 1.5 lakh. For an enterprise in its initial stage, a negative cash flow of Rs. 50,000 is a significant setback, capable of hindering operations. 

Thus, maintaining positive cash flow is prudent, and often an indication of a business’s success. Sufficient cash flow allows an organisation to upscale its operations more efficiently, forming the roadway to further growth. 

How To Improve Cash Flow Management?

Your business’s survival and growth hinge on proper management of cash flow; and, there are several ways in which that can be achieved. Take a look.

  • Stay On Top Of Cash Flow

You may want to start preparing a blueprint. Set in detail the inflows and outflows that you expect to occur in your business beforehand. At least a year’s forecast, in that regard, may suffice to streamline your future cash flows, thus ensuring efficient cash flow management

  • Arrange Better Terms With Suppliers

Try and negotiate for more favourable repayment terms with the suppliers. Opt for opportunities with suppliers where you can either retain cash for longer or reduce the outgo. For instance, see if the supplier is providing discounts on early payments then take advantage of that.

  • Optimise Payments From Debtors

It is evident that late payments will affect your organisation’s ability to meet operating expenses adequately. Thus, you may take different approaches to ascertain that your customers are clearing the bills ahead of time or right in time. 

For instance, you could offer discounts that incentivise early payments. You could also keep in place a credit check of your customers if possible. However, despite these measures, the cash conversion cycle may lag. In such a case, you can turn to opt for invoice discounting service to get additional capital.

Invoice discounting allows you to leverage the unpaid invoices to an avail cash advance. Invoice discounting is a convenient funding option that allows businesses to address their short-term funding requirements easily and maximise operational efficiency. 

These are the ways you can efficiently execute your business cash flow management to ensure it functions optimally, creating optimal scope for sustenance as well as success.

The Bottomline

Cash flow management is prudent for any organisation to stay afloat. Managing the cash inflow and outflow, keeps you in control and thus helps in reducing operational challenges.

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