Even profitable businesses go bust

It seems an oxymoron that a business making plenty of sales can go under.  However, making sales and having money in the bank is not the same thing. You could be signing plenty of deals for handsome amounts but until you collect the money you can't spend it. Consequently, if the money isn't flowing into the business to satisfy creditors and suppliers when it's needed, then trouble beckons. In such circumstances even profitable businesses can go bust.

Some of the main reasons why a successful business can run into trouble are detailed below:

Focusing on profit instead of cash flow

While profit is a goal for every small business, the number one priority has to be cash flow. No cash flow, no business - end of story! Therefore, for some business decisions you have to weigh up profitability versus cash flow. Some bigger jobs may pay well, but if you have to wait too long before being paid, your business can run into cash flow pressures.

For more information on controlling your cash flow read Managing cash flow for small business>>

Ignoring the relationship between receivables and payables

To pay your suppliers it is crucial that your receivables (the money owed to you by clients) are coming in on a timely basis. In a perfect world no receivables would ever be overdue and you would always have the cash at hand to pay your suppliers (payables). However, we all know this isn't the case and subsequently many receivables have to be chased up. Being lax about this process is one of the key reasons behind small business failure in Australia.

If you don't have the time to undertake this process, or generally don't feel comfortable about debt collection, consider hiring an account receivables clerk or - if you think a stronger approach is needed - call in professional debt collectors.

Want more information on collecting receivables? Read 'Tips to ensure you get paid'>>

Paying suppliers too quickly

Trade credit (credit afforded by one business to another) is provided with payment terms, i.e., <30 days, 45 days, 60 days etc. To keep your cash flow in the healthiest state possible, you should take advantage of payment terms and not pay too early.

Basically, the situation you want to avoid is to paying your suppliers before your clients pay you as this can open up a dangerous gap in your cash flow. However, in saying that, you also want to maintain good relations with your suppliers so don't abuse your payment terms. The more you pay within terms the more likely you are to receive better conditions or assistance when you are experiencing difficulties. Additionally, because your payment history is listed on your company's credit report, a good track record of paying on time will be seen favourably by your future suppliers. Just don't pay too early!

To learn more about how managing your supplier payments can improve read 'Inside-out - fund your business growth'>>

Surplus stock

Your business might be making good sales but even in this situation it is pivotal that you don't overestimate the stock it requires. Surplus stock is simply tying up your cash and if you need it in a hurry then shelf loads of goods aren't that much use to you.

Therefore, you need to be acutely aware of what kind of stock levels your business needs. Don't simply buy more stock than you need because it is on sale, it might present a possibility of increasing your profits but it might sooner lead to unnecessary cash flow problems.

To learn how to control your stock levels read Stock effects cash flow>>

Bad invoicing

Losing track of your invoicing is a sure fire recipe to put your cash flow under pressure. You might be making great sales but if you are losing track of who owes you what and when it is due you are asking for trouble. Contractors can also run into invoicing issues by losing track of the services they have actually provided for the job. Using an electronic job management system allows you to stay on top of quoting and invoicing issues so when it comes to writing the bill you charge exactly for the work you have done.

For more information on good invoicing practice read Get paid faster using smarter invoicing'>>

Extending credit to the wrong customers

What is the use of selling goods or services to a customer if they can't pay you? The answer of course is 'none' - you are simply giving it away. Don't put your business at risk by doing business with customers that have poor credit records. Get all the information before extending credit so you know that you can make an informed decision.

Dun & Bradstreet can provide credit reports on business owners and firms. Visit www.dnb.com.au for more information.

While making healthy sales is a great thing for any business, you need to make sure that there aren't other aspects to your business that are undoing all the good work. By taking into account the above tips and advice you are in a much better position to make the savings that could save your business from experiencing financial difficulty.

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