Recognizing if your business is heading into financial trouble
It’s unlikely that small business owners ever feel like their finances are perfect at any given moment. After all, who wouldn’t be happier if profits were higher and expenses were lower? Worrying about every missed opportunity to make a dollar isn’t good for your stress, and it isn’t necessary for success either. There are, however, certain financial problems that you should devote more attention to than others because they could spell big trouble for the future.
One factor that spells potential trouble down the line for a small business is the lack of a diverse client base. If you just have a couple of loyal clients, you may be telling yourself not to worry because you can trust that they will stick around. The fact of the matter is, however, you can’t predict what clients will do in the future, and it is, therefore, important to maintain solid plans for acquiring new clients that you update on a continuous basis.
If you’re so focused on meeting your business’s current needs that you don’t spend time or money planning for future growth and changes, it is another red flag. Examine how much of your budget is going to meet current needs and how much of it is dedicated to future concerns to determine what steps you should consider taking to reorient your budget.
“Markets change frequently, thanks to the changes in public demand and the pace of technological innovation. To succeed, a company will need to nimbly recognize changes as they come, adapt and take advantage ahead of their competition,” states Murray Newlands from Entrepreneur.com “A hefty research and development budget is vital.”
If you’re having trouble making a profit, you should be seriously considering all potential avenues for bringing in more income and cutting costs. One of the biggest areas for wiggle room is the pricing of your products and services. It’s easy to simply increase your prices, but a huge increase could have a negative impact on your business. Go slowly when increasing prices and monitor carefully as you do. It’s also a good idea to keep prices for existing clients the same while you try to come up with new prices and only change prices for incoming new clients.
“If you’re getting pushback, you might have raised them too much,” states Jayson DeMers from Forbes.com. “If you’re closing sales too easily, you might have room to raise those rates even more.”
In addition to profit, cash flow is a very important indicator of your business’s financial future. It’s entirely possible, and entirely too common, to be profitable while still having cash flow problems. If you focus all your attention on your profitability and ignore slumps in cash flow, you could be heading for danger.
“When you’re running a business, the ultimate sign of financial distress is usually running out of cash – you just don’t have any money left,” states Brian Hamilton from Entrepreneur.com.
There are many factors that go into whether or not your business will have a positive cash flow. Some of the most general factors are how expenses and incomes are scheduled, if your business experiences significant fluctuations during certain times of the month or year, if your business requires periodic large expenses for inventory or if there are long delays in product readiness after supply acquisition (such as to age wine).
If you don’t have good cash flow, talking to a financial advisor is your best solution, due to the complexity of the issue.
“At some point, all businesses need a good accountant — one who is experienced in financial analysis and who can help you navigate through this issue of liquidity,” states Hamilton.
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