When you look at the unchanging situations of life, one primary reason why business owners struggling with cash flow is due to management of cash flow. However, it’s not that difficult to master it. You can learn, nurture and grow this skill if utilized correctly. In this blog post, you will know the basics of cash flow, cash flow calculation, factors affecting cash flow, and finally five easy steps to solve it.
Understanding the Importance of Cash Flow
The cash flowing back and forth in your venture is deemed as cash flow. It can be divided into two types:
- Positive cash flow.
- Negative cash flow
When more money is injected into the business rather than money leaking out of the business is known as positive cash flow. On the contrary, if less money is flowing into your business and more money is going out then it is termed as negative cash flow. Negative cash flow might as well be the end of any business. Poor profit margins, less turnover, and more overhead expenses are all directly related to negative cash flow. Hence, it is necessary for you to understand and keep track of your cash flows.
Calculating Cash Flow
You can calculate cash flows in 3 simple ways:
1) Operational cash flow + interest expenses - tax shield on interest expense - capital expenditures = free cash flow.
2) Revenue on hand - operating expenses - tax - operating overhead expenses = free cash flow.
3) Gross revenue - capital investments - tax - working capital = unlevered free cash flow.
The last formula isn’t so frequently used in daily life. However, it is a great way to measure your business performance if it was to perform without the inclusion of debts and interest expenses.
Now, that you understand the basics, let's dive deep and figure out the reasons why your business might be facing difficulties with cash flow and how to solve them:
1) Payment Processing Time
As per Quickbooks, entrepreneurs and business owners added that the reason why cash flow is impacted is because of the processing time after a payment has been made. Most e-commerce business owners are facing this same issue with their payment processors consuming more time than necessary and freezing funds without any reason from time to time. These payment processing companies make the excuse of “safety net” and do this deed.
Not to worry, with Myuser payment processing system you don’t have to experience the delay of payment processing even after you get paid. Get paid instantly with the credit card issued for free by Myuser and reinvest in your business for growth. You no longer need to wait 2-7 days. With Myuser, save 2% on each transaction and receive unlimited payouts around the globe.
Solution: Hence, instant payouts can be a major solution to these payment processing issues.
2) Not Knowing About Business Spending Habits
Your business spending habits can be weighing down on your business. If you are a small business owner then you must have adequate knowledge when and where to spend. To elaborate, sometimes, having proper knowledge is not enough, you must track your business expenses. Now this issue can arise due to two reasons:
- Business owners blend in their personal and business expenses by depositing money in a personal bank account. Therefore, later on, it becomes difficult for them to distinguish what amount of funds were allocated for business purposes. This way your business cannot keep track of funds moving in and out of your business.
- Just because funds are not kept separately, business owners cannot take advantage of expense control functionalities and book-keeping integration services offered by certain payment processing companies.
Solution: Keep your business and personal expenses separate. Try not to miss out on advanced features offered by your payment processor, such as cash management, accounting integration, etc. Make a business account solely for your business to track funds properly.
3) Poor Pricing Game plan
Make sure to label your products and services correctly. Otherwise, it can result in negative cash flow. If you are undercharging your customers, less cash is injected into your business even though you are getting a good volume of sales. However, in the long run this won’t sustain. On the other side, if you are overcharging your customers you will have low turnovers, resulting in less revenue for your business. The key is to find a balance between undercharge and overcharge.
Solution: To solve this issue, you must scrutinize the cost of process and materials needed in your product or service. Keep a keen eye on your book of expenses and try to compare your pricing with that of competitors. Maintain a reasonable pricing tag which will balance out both traffic and profit margin.
4) Bad Choice of Payment Processor
People often make the mistake of choosing a payment processor who is popular in the market. Being popular doesn’t mean being the best. If you are centering your decision on that, you are one step closer to meeting your business doomsday. These PSP (payment service providers) take interest in their own selfish profit making. They might charge you twice the amount at first then suddenly when your business is scaling towards growth, they will switch off the growth button and strangle you in a lot of unnecessary bindings. Such payment processing companies have the habit of freezing your funds any time.
Thus, restricting you from business growth. Not only this, if a fraudulent customer requires a refund, they don’t take the time to analyze what could have gone wrong in the transaction and makes it easier for customers with chargeback claims.
Solution: Take time to research your payment service provider. Make sure they support fast-growing businesses and they are also aware of chargeback claims. Myuser specializes in providing service to high-risk businesses. Whether you have a drop-shipping or e-commerce business, if you are a legitimate user, Myuser got your back in resolving chargeback disputes. They offer chargeback protection to gradually lower the dispute rate. Hence, sustaining your business for long-term operations.
5) Difficult To Get Loans
It’s very difficult to get loans and invest in your business if you are operating as a sole proprietor. You might face a severe liquidity crisis. Hence, take time to consider your business structure and decide on your big business move. It gets tough to run a business without proper capital.
Solution: Seek professional consultation before being hasty about your decision. Remember, you are solely responsible for your business operation. Tag teaming might be a better option than riding solo in your venture. More business cap makes it easier to get loans and grow your business.