According to official statistics by the Government of India, small and medium enterprises (SMEs) make up 95% of the total industrial units in India, with a whopping 4.25 crore industrial units that account for around 45% of the manufacturing output of the country and employ 40% of the skilled workforce.
However, the hard truth is that over 70% of these businesses do not last 10 years from their start. Out of this, 82% of the failing businesses do so because of either a lack of proper cash flow management or due to poor understanding of cash flow.
Therefore, cash flow problems are the biggest threat to a small business. But what are cash flow problems in the first place? A cash flow problem is a situation where in the business is spending more money than they are getting in a particular period.
Here are some of the most common cash flow problems that trouble small to mid-sized businesses:
Expecting Quick Profits
When a business opens its doors for sales, many of them expect that customers will line up for them and they will start getting profits soon enough and take higher stock on credit from vendors than was needed.
However, according to a survey by a US based firm, only 68% of SMEs get profits in the first year and 84% of them get profits in the first four years.
If the business is not prepared for this, it can create cash flow issues early on. The business must set a reasonable time frame by which they can attain profitability and hold enough cash to ensure continued operation till then.
Not Creating a Budget
A cash flow budget or forecast is an estimation of how much cash the business expects to receive and how much they expect to pay in each time frame. Therefore, when creating a cash flow budget for 30 days, map out how much cash is expected to be received and how much is expected to be spent in those 30 days.
With the help of a cash flow budget, the business can finally find answers to crucial questions like will the business have enough to pay their bills at that time and by when it expects the accounts receivables to come in.
Overlooking Overhead Costs
Overhead costs are regular indirect expenses that are important for the business but do not create revenue. If a small or medium business’s overhead costs are higher than necessary, they will create cash flow problems and start eating up on the profits.
Expenses like higher office rent or expensive car leases can easily and rapidly deplete the profits, leading to an uphill battle where the business will have to sell even more just to break even.
Slow Receipt of Receivables
The business may be experiencing success in sales, but if the clients are slow to pay, it can put the business in a tough spot. Slow collection of receivables can negatively impact business growth and not allow it enough money to take the business forward.
Moreover, when the company does not receive the money from the client on time, it also cannot send money to the vendor on time.
Putting a proper and effective receivables accounts process in place and giving credit only to those clients who have always made timely payment is the key to avoid any receivables-based cash flow problem for the business.
Solution
There are many more reasons that create cash flow problems for small and medium size businesses. Fortunately, there is one solution that can solve all these problems – ZikZuk Technologies’ Business Finance Manager (BFM).
BFM is a business intelligence platform for SMEs that gives a 360° view of the business’s financial situation, forecasts future cash flow and gives actionable insights to ensure better cash flow management.
Moreover, it automates the collections to be received from the debtor through timely payment reminders and allows for integration with Tally by which the entire accounting process can be streamlined.
Apart from BFM, ZikZuk also provides founderscard, a credit card designed for entrepreneurs that helps them address their current credit needs and save on early payments to vendors.