Most businesses – be it small or big – struggles with cash flow gap at some stage. However, it can be really detrimental for a small business.
Here we have listed down a few common causes that widen that cash flow gap:
1. Inefficient Financial Planning and Management
There is a saying: Failing to plan is planning to fail. Effective planning and disciplined approach is the key to a successful small business.
The lack of a disciplined approach and competent financial planning can result in cash flow shortages. It is essential to work to a detailed financial plan and reviewing it regularly helps you to anticipate a potential cash flow gap and take action to make sure the gap is plugged before it causes any severe damage. Being able to predict the gap also enables you to prepare an action plan to access additional funding.
2. Lack of Inventory Management
Lack of inventory management can be a deadly mistake. The overabundance of excess inventory means your valuable cash is stuck in a product that is still with you and not with the customer, which does not necessarily contribute to wealth generation. Moreover, when you buy in bulk without turning over your stock, this can lead to the product becoming obsolete. Therefore, you need a strategic approach to inventory management. With a robust inventory management system, you can quickly monitor the inventory levels and even undertake stock-telly on a regular basis, clearing the discontinued and obsolete stock.
3. Rigid Funding Facilities
Whatever approach you take towards funding, it is essential to assess whether the approach will provide the right solution continually. For example, the funding approach that worked for you as a start-up will not necessarily be the best choice if you are taking your business to the next level. It is important to remember that the funding options for small businesses are evolving. It is recommended that you gauge your current funding solution against other products available in the market to check if there are other better options for your business.
Cash flow gaps are common but understanding some of the causes can help you find the solutions that help you keep cash flow steady and ensure financial stability and growth for your business.