Cash flow makes or breaks a small business. If you don’t have the cash to pay expenses and make payroll, then your business can’t survive. Simply put: no cash, no business. This can and does happen even if you have all the customers you want and talented employees who do their jobs well.
Small business cash flow management and payment practices references Atradius Payment Practices Barometer for the Americas, a survey that looks at B2B payment behaviors.
Effects of unpaid invoices
Atradius’ report explains the effects of unpaid invoices:
“Unpaid invoices can have a serious impact on a businesses’ turnover or cash flow. Not only because non-payment by buyers costs a business time and money in respect to pursuing collection of debts, but also because bad debt reserves represent money that is unavailable for use in growing the business. In addition, the longer the receivables remain outstanding, the lower the likelihood of turning them into cash.”
A small business low on cash makes late payments to vendors and employees. It can’t pay what it doesn’t have. Unfortunately, this leads to more problems that eventually reach a point when there’s no saving the business. It happens more often than you think.
Not getting financing to pay bills and make payroll when you need it causes the following problems:
1. Vendors won’t deliver or they deliver late.
- To get its business-critical products or services faster, the company could shell out a lot of money to express the money to the vendors. This adds to the cost.
- Employees needing the product or service grow frustrated and more stressed because they can’t get work done, or do things the hard way. This leads to higher turnover rates and a drop in employee morale.
2. Making late payments to employees and contractors.
- Employees and contractors will complain. They have bills to pay, too. As a result, management has to field the complaints. This wasted time that can be avoided.
- If late payment fees are involved, then it costs the company more money.
Solving the late payment problem
Protect your company by having a Plan B. That plan is knowing where you can get working capital to tide you until you restore and balance your cash flow.
Small businesses that have many unpaid invoices are at the mercy of the companies who make up the bulk of their income. These businesses lose valuable revenue generating time as they chase down accounts receivables and resolve the late payment problem.
These companies can put Plan B in action and improve cash flow with invoice financing in which they sell their accounts receivables to a factor. (A factor is a company that buys the invoices at a discounted rate.)
Improve cash flow, reputation, and happiness
Getting a small business loan or working capital would drastically cut the number of problems for the company’s leaders. Employees won’t spend productive time on the avoidable activity of trying to find out why the business hasn’t paid them or provided what they need to do their jobs. Vendors and contractors will stop bothering management for payment.
With a line of credit or accounts receivables financing, the company can make most of its problems go away and return to spending more time on moneymaking tasks. Since motivated employees are passionate — at least they tend to be when working on the core business — morale climbs.
The company’s reputation would also get better. Right now, it has a bad rep as a result of not paying its employees and vendors. It doesn’t take much for a disgruntled employee or vendor to tell someone. The news could spread to others who won’t want to work with or for the company.
If the company wants to grow business, keep its best employees, and boost its relationships with vendors, then it needs a Plan B or find a better way to manage cash flow. Don’t let your business fall between a rock and a hard place. Get a handle on your cash flow and you’ll do just fine.
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