Last updated on Feb 28, 2024
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- Cash Management
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Seasonal fluctuations
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Long payment cycles
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High fixed costs
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Rapid growth
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Regulatory changes
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Here’s what else to consider
Cash flow is the lifeblood of any business, but it can also be a source of stress and frustration. Managing cash flow effectively is a crucial skill for any entrepreneur, but it can be especially challenging in certain industries. In this article, we will explore some of the common cash flow challenges that you face in your industry, and how you can overcome them with smart cash management strategies.
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- John Tucker Cannabis Cash and Coin Transport | Talaria/NST | Helping MRBs with secure Cash and Coin logistics
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- Marco Sousa VP of Operations, Co-founder at Principia
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- Kim Throndson, CPA, CMA Non profit finance/accounting
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1 Seasonal fluctuations
Some industries are highly seasonal, meaning that they experience peaks and valleys in their sales and expenses throughout the year. For example, if you run a landscaping business, you may have more work and income in the spring and summer, but less in the winter. This can create cash flow gaps that can affect your ability to pay your bills, invest in your growth, or deal with unexpected emergencies. To cope with seasonal fluctuations, you need to plan ahead and budget accordingly. You can also use cash flow forecasting tools to project your income and expenses for the next 12 months, and adjust your spending and saving habits accordingly. You can also look for ways to diversify your income streams, such as offering complementary services or products, or expanding your market reach.
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- Marco Sousa VP of Operations, Co-founder at Principia
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In the education industry in Latin America, students often fall behind on their payments until the semester turn, when they need to negotiate to re-enroll. This cultural delinquency creates a significant gap in the cash flow of educational institutions, which continue to bear all fixed costs. Being prepared for this seasonality can save the business, ensuring that it has enough cash on hand to weather the semester without resorting to bank loans.
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- John Tucker Cannabis Cash and Coin Transport | Talaria/NST | Helping MRBs with secure Cash and Coin logistics
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I've worked with many merchants that were seasonal, with spikes in business due to a regulatory event every year (hunting season), or business changes based on the weather. The best thing a business can do is make sure to not over hire nor under hire, make sure to keep adequate levels of cashflow, and make sure to capitalize on their busy season by planning months in advance.
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- Karim Farah Accounts payable Team lead at CMA CGM
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Another common cash flow challenge for businesses is managing inventory effectively to avoid overstocking or stockouts, which can impact liquidity. Additionally, high fixed costs and variable revenue can create cash flow fluctuations.
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2 Long payment cycles
Some industries have long payment cycles, meaning that it can take a long time for you to receive payment from your customers or clients after you deliver your goods or services. For example, if you work in the construction industry, you may have to wait for 30, 60, or even 90 days to get paid by your contractors or subcontractors. This can create cash flow shortages that can affect your ability to pay your suppliers, employees, or taxes. To cope with long payment cycles, you need to negotiate favorable payment terms with your customers and clients, such as asking for deposits, progress payments, or discounts for early payments. You can also use invoice financing or factoring services to get immediate cash for your outstanding invoices, or use credit cards or lines of credit to bridge the gap between your receivables and payables.
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- John Tucker Cannabis Cash and Coin Transport | Talaria/NST | Helping MRBs with secure Cash and Coin logistics
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I've worked with many B2B clients that billed using Net D, which is to provide services/products upfront but to invoice their clients and not be paid until 30 to 180 days later. This creates Accounts Receivable (AR) for the Supplier and Accounts Payable for the Supplier's client. AR Financing or Factoring could be utilized to help with cashflow crunches while awaiting payment. Trade Credit Insurance is another product that could be used to help manage the risks of self-insurance in this regard, as many Suppliers end up holding a lot of Bad Debt.
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- Marco Sousa VP of Operations, Co-founder at Principia
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Utilizing factoring may result in sacrificing a portion of profitability, but it is essential in ensuring financial health. This advance on receivables can solve cash flow problems, securing payroll and supplier payments, thereby keeping operations intact regardless of the industry's seasonal fluctuations.
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3 High fixed costs
Some industries have high fixed costs, meaning that they have to pay a large amount of money every month for things like rent, utilities, equipment, or insurance, regardless of their sales or profits. For example, if you run a restaurant, you have to pay for your lease, food, staff, and utilities every month, even if you have fewer customers or lower revenues. This can create cash flow pressure that can affect your ability to cover your variable costs, such as marketing, inventory, or maintenance. To cope with high fixed costs, you need to monitor your cash flow closely and cut unnecessary expenses. You can also look for ways to reduce your fixed costs, such as negotiating lower rates with your landlords or suppliers, or switching to more energy-efficient or cost-effective equipment or systems.
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- John Tucker Cannabis Cash and Coin Transport | Talaria/NST | Helping MRBs with secure Cash and Coin logistics
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Companies should always strive to be as lean as possible, which includes not having too much real estate, too much equipment, or too much overhead in general that increases cost of operations, which will decrease profitability. Businesses should try to predict profit margins upfront so that they can anticipate how much they can take on in terms of cost of operations and from there, that should lead their decision in terms of leasing/financing/owning fixed assets.
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- Marco Sousa VP of Operations, Co-founder at Principia
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Identify the largest items in your budget and directly reduce costs in those areas. Avoid expending substantial team energy on cutting insignificant industry costs, such as coffee expenses. Instead, focus on relevant fixed cost lines. For example, if your largest fixed cost is office rent, assess the feasibility of transitioning part of your team to remote work and relocating to a smaller office space.
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4 Rapid growth
Some industries have rapid growth, meaning that they experience a surge in demand for their products or services, and have to scale up their operations quickly to meet it. For example, if you run a software company, you may have to hire more developers, buy more servers, or upgrade your software to keep up with the needs of your customers or clients. This can create cash flow challenges that can affect your ability to fund your expansion, or maintain your quality and customer satisfaction. To cope with rapid growth, you need to manage your cash flow carefully and prioritize your investments. You can also look for ways to finance your growth, such as raising capital from investors, partners, or lenders, or using crowdfunding or pre-selling platforms to generate cash in advance.
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- John Tucker Cannabis Cash and Coin Transport | Talaria/NST | Helping MRBs with secure Cash and Coin logistics
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Rapid growth is a blessing, but it can quickly turn to a curse if not managed properly. Companies should closely watch their business trends to anticipate growth patterns and scale their businesses accordingly. Warning though, be careful not to add too much overhead in terms of more buildings, people, and technologies than absolutely required, because a rapid downturn in business could create a lot of havoc due to needing to quickly downsize.
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- Marco Sousa VP of Operations, Co-founder at Principia
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Scaling a business is often a challenging endeavor in terms of cash flow. The most crucial step is to ensure that you have a solid investment fund in place before starting to build the necessary operational infrastructure. Alternatively, securing an aggressive line of credit is vital to avoid financial precariousness, ensuring that there will be sufficient cash flow to maintain the business's financial health each month.
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5 Regulatory changes
Some industries have regulatory changes, meaning that they have to comply with new laws, rules, or standards that affect their business operations or practices. For example, if you run a health care business, you may have to adapt to new regulations regarding privacy, safety, or quality of care. This can create cash flow issues that can affect your ability to meet the requirements, or avoid penalties or fines. To cope with regulatory changes, you need to stay informed and updated on the relevant laws and regulations that affect your industry, and plan ahead for the potential costs and impacts. You can also seek professional advice or assistance from experts, consultants, or associations that can help you comply with the regulations, or find ways to minimize the costs or risks.
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- John Tucker Cannabis Cash and Coin Transport | Talaria/NST | Helping MRBs with secure Cash and Coin logistics
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New tax laws, industry standards, and other regulations are a normal course of life in just about every industry. Always keep a close-knit network of professionals in different aspects of law, so you can remain aware of potential changes and make the necessary moves for compliance.
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- Marco Sousa VP of Operations, Co-founder at Principia
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The risk of regulatory changes in some industries is constant. However, depending on the size of your business, maintaining an adequate team of specialists and lawyers to monitor and assist with compliance can be a significant fixed cost. Therefore, it is essential to allocate a portion of your budget to potential regulatory changes and to consider hiring a consultancy that can provide more cost-effective and assertive monitoring and support.
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6 Here’s what else to consider
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- Kim Throndson, CPA, CMA Non profit finance/accounting
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Information is the key to cash management. Have a great internal accountant, bookkeeper, or service to help you with the accounting, but ask for information daily. Most accounting software has reporting built in, or has the ability to create custom reports. Business owner and managers should be checking their numbers and bank accounts daily. Some basic reports to pull daily would be your daily bank activity from your bank, AR aging, AP aging, and your income statement.
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- Trina Pruitt Cloud Source Bookkeeping
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One thing I found helpful is to have a separate account for sales tax. Moving the money into an account separately can help remove the temptation of using that money for something else.
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