Why isn’t my cash balance improving?

Why isn't my cash balance improving?
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Why isn’t your cash balance showing signs of improvement when your business is generating profits? This question is common among business owners and deserves a thorough examination.

The truth is that profitability, while fundamental to running a successful business, doesn’t always translate to a healthier cashflow. In this article, we delve into the reasons behind why your cash balance is static or dwindling, and offer insights on how to solve that problem.

1. Timing mismatches

Unpaid client invoices can be detrimental to your firm’s fiscal health – particularly if you rely on large but infrequent payments. Even if business is booming, a missed invoice can compromise your cashflow, making it difficult to pay your own suppliers and vendors on time.

Our suggestions:

  • Regularly review and adjust your payment terms with clients and suppliers.
  • Implement a robust invoicing system to ensure timely payments.
  • Automate reminders using your cloud accounting software to chase up late-paying clients.
  • Talk to your accountant about invoice financing if you foresee getting into a tight spot due to delayed or late payments.

2. The overhead factor

Running a business requires ongoing overhead costs such as rent, utilities, insurance and employee salaries. As your business grows, these expenses grow with it.

To ensure your outgoings don’t hamper your cashflow, you should keep a close eye on your spending. Identifying areas where you can cut costs or negotiate with suppliers can release more funds, enhancing your financial flexibility and stability.

Our suggestions:

  • Conduct regular audits of your overheads and work with an accountant to identify potential savings.
  • Explore alternative suppliers or service providers to ensure you get the best value for money.
  • Review any unused subscriptions to find out where you can cut back.
  • Consider long-term methods of reducing overheads. For example, by upgrading to more energy-efficient equipment or business practices.

3. Inventory management

For many businesses, managing stock levels is crucial to maintaining a healthy cash balance. If you have money tied up in unsold inventory, this can significantly restrict your cashflow.

To combat this challenge, you should implement effective inventory management practices. Be careful with how much product you offer – over-ordering and being left with too much stock can be very risky for long-term cashflow. But it’s also important to ensure you have enough products to meet consumer demand.

Our suggestions:

  • Use inventory management software to optimise your stock levels.
  • Keep a close eye on seasonal spending habits, market trends and your sales data to inform buying decisions.
  • Build good relationships with suppliers and vendors – in some cases, they may allow you to adjust your payment terms.

4. Navigating debt

Debt repayments can use up a considerable portion of your available funds, especially if the terms are unfavourable. Evaluating your current debt situation and exploring alternative finance options can help you improve cashflow.

Our suggestions:

  • Regularly review your debt agreements and talk to your accountant or a finance broker about your refinancing options.
  • Prioritise paying off high-interest debts.
  • Speak to a professional before taking out a business loan to ensure you get the best deal.
  • Consider alternative ways to raise capital that offer more favourable terms.

5. Seasonal variations

Businesses in certain industries such as retail, leisure and hospitality experience seasonal fluctuations, leading to periods of high income followed by leaner months.

Anticipating these trends and setting aside funds during profitable months can ensure a more stable cashflow throughout the year, safeguarding your business’s financial stability.

Our suggestions:

  • Identify your business’s seasonal patterns and budget accordingly.
  • Use the offseason to focus on marketing and business development.
  • Consider diversifying your product or service offerings to reduce dependency on seasonal income.

Summing up

Bridging the gap between profitability and a healthy cashflow often takes time and expertise to get right.

By consistently ensuring timely payments, keeping an eye on your outgoings and preparing for seasonal fluctuations in income, you can set your business up for success.

At Team SAS, we’re dedicated to helping businesses navigate these challenges, offering strategic financial advice and solutions tailored to your unique needs.

Don’t let the mystery of a stagnant cash balance hinder your potential – reach out to us to secure a more prosperous financial future. If you would like to discuss how we can support your business with our accounting outsourcing and virtual CFO services, please get in touch. We look forward to hearing from you.

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Use of this information is for reference only. Specialist Accounting Solutions Ltd accepts no liability for any errors therein or any losses or damages arising from it.

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