Effectively handling how money moves in and out of a business is crucial for keeping it going strong. It affects how much money the business makes, how flexible it can be, and how healthy its finances are overall.
Looking ahead to 2024, it's clear that many businesses face challenges in their early stages because they struggle to handle their cash flow issues. In the United States, for example, a significant number of new businesses don't make it past their first year. And the odds get worse over time, with more businesses closing down by the second and fifth years. This shows just how important it is for businesses to be good at managing their cash flow if they want to stick around and do well in the long run.
4 Important Cash Flow Issues to Monitor in 2024
1. Issues with Managing Cash Flow
Managing cash flow involves predicting how much money will come in and go out of a business and deciding how to use that money wisely. To do this well, businesses need to accurately guess how much money they'll make and spend in the future. This is easier when the economy is steady, but unexpected events can quickly change things. When the market is tough, businesses often rely on the money they've saved up to stay afloat.
Out of every 400,000 businesses that start each year, half won't make it past five years. One big reason for this is not handling their money well. 82% of failed businesses say this is one of the main reasons.
2. Ignoring the Importance of Cash Flow Forecasting
Cash flow forecasting helps companies predict how much money will flow in and out of their business over a certain time. It's essential for managing finances and making decisions about funding, spending, and investments.
Companies can forecast cash flow for different periods. Short-term forecasts cover about a month and help identify immediate funding needs or extra cash. Medium-term forecasts look ahead between a month and a year, while long-term forecasts project cash flow for up to five years or more. However, the longer the forecast, the less precise it tends to be due to unexpected changes.
Here are some reasons why it's important:
It shows you how much money you expect to come in and go out over a certain time, like months or quarters. This helps you plan for the short and long term.
It helps you decide if you can afford to do things like start new projects, hire people, or grow your business.
It lets you see if there might be times when you won't have enough cash. If you spot these gaps early, you can do things to fix them, like getting a loan or cutting spending.
3. Implementing Cloud-Based Accounting Systems
Thanks to Artificial Intelligence (AI) and automated finance tools, many accountants now use cloud-based accounting. Nearly all 94% of accountants have made the switch, with a majority of 67% preferring it over older methods.
Yet, 60% of small business owners admit they lack financial know-how. Surprisingly, only a small fraction of 14% think accountants could help them save more on taxes. Hiring an accountant can also be expensive for small businesses, ranging from $20 to $100 per hour.
4. Late Payments Lead to Overdraft Dependence
Small businesses need to keep their money flowing smoothly by handling their finances well and staying on top of Accounts Receivable (AR). This means they need to keep track of the bills they send to customers and make sure they get paid on time.
In April 2020, Quickbooks did a big study called The State of Small Business Cash Flow all around the world. They looked at how money moves in businesses run by one person or a few people.
Their study found:
34% of SME business owners experiencing late payments say they have to rely on overdrafts to help them meet their monthly obligations.
1 out of every 7 small business owners couldn't pay their workers because they didn't have enough money at the right time. In the UK, this means about 2.2 million people didn't get paid on time.
38% of small business owners who had money problems couldn't pay back what they owed.
On average, small business owners lost about £26,000 because they had to say no to jobs when they didn't have enough money.
Final Thoughts
Succeeding in business now means staying informed and flexible. Even with constant changes, managing cash flow effectively remains crucial. For small and medium businesses to thrive in a tough market, they need to embrace new ideas. Using financial technology (fintech) in cash flow management gives them an advantage by making them more nimble and able to react quickly to market shifts.