More than 60% of business owners struggle with cash flow issues on a regular basis. This is a concerning figure considering cash flow problems are one of the main reasons businesses fail. Budget shortfalls can prevent you from paying your bills on time, causing you to rack up costly late fees. Constantly being in the red can also stagnate your company’s growth because you can’t invest in the equipment and inventory you need to grow.
If you experience frequent cash shortfalls, it’s important to figure out why and come up with solutions to improve your company’s financial situation. Here’s why maintaining steady cash flow is crucial if you want your business to succeed.
1. Proper Cash Flow Management Allows You to Pay Bills On Time
It’s basic math—if your company doesn’t have enough money coming in every month, it won’t be able to fulfill its financial obligations. You might get hit with costly fees if you can’t pay your rent, vendors, and loans on time. You may also face steep penalties from the government if you miss payroll tax deadlines due to poor cash flow.
Making a habit of paying loans and other bills late can also damage your company’s credit score and reputation. This may make it harder to secure financing and vendor contracts in the future. Eventually, your business could go under if you can’t get your cash flow problems under control. About 80% of small businesses fail due to cash flow mismanagement.
2. Steady Cash Flow Enables You to Build an Emergency Fund
Sometimes business slows down unexpectedly due to events outside your control like natural disasters or economic downturns. Even if your cash flow forecast predicts strong earnings, you never know what will happen in the future. Sales could come to a halt or essential equipment could break down, saddling you with a large unplanned repair bill.
That’s why it’s important to have cash reserves set aside—so you can keep your business going despite sales disruptions or other emergencies. Experts recommend keeping at least three to six months of operating expenses liquid in a bank account. Properly managing your cash flow and keeping your business in the black will make it easier to build the rainy day fund you need.
Novo Makes It Easier to Save
Another thing that makes it easier to save is a good business checking account like Novo. Powered by Middlesex Federal Savings, F.A., Novo is a comprehensive business checkingsolution loaded with useful features to help you stay on top of your finances. For example, Novo’s checking accounts allow you to create up to five cash reserves and earmark them for different purposes, such as taxes, emergencies, or payroll.
You’ll be able to automatically allocate income to certain reserves within your checking account, helping you better manage your surplus cash flow. You can also transfer money in and out of your reserves instantly, giving you the flexibility and liquidity you need to deal with emergencies.
3. Cash Reserves Make It Possible to Grow Your Business
Maintaining steady cash flow also makes it possible to expand your company and take more risks. If you have surplus cash flow and money in reserves, you can reinvest it into your business. You’ll be able to afford the equipment, employees, and inventory you need to grow without taking on excessive debt.
Having extra capital on hand also allows you to take chances that could pay off in the long run. If you try to expand into a new market and fail, you’ll be able to weather the financial loss. A company that’s in the red and barely getting by each month can’t afford to take risks. But if you have a strong cash position, you’ll be able to make some calculated gambles that could take your business to new heights.
4. Good Cash Flow Management Helps You Avoid Debt
Although it’s normal for businesses to have debt, owing an excessive amount of money can put you in an unstable financial position. Experts recommend you keep your company’s debt-to-income ratio under 50%.
In order to limit your debt, you have to successfully manage your cash flow. Many business owners take out loans and lines of credit to cover cash flow gaps, believing they’ll be able to pay them off when sales pick up. But if you rely too heavily on financing to cover budget shortfalls, you could get caught in a debt cycle and struggle to repay your loans.
Resolve Cash Flow Issues With Novo
Luckily there are better ways to resolve your cash flow issues than continually borrowing money. Novo has lots of features that can help you take control of your cash flow and cover budget shortfalls without paying interest.
Its business checking account integrates with your accounting software, e-commerce platforms, and payment processors to give you a bird’s eye view of your company’s finances. You’ll be able to send invoices, view your revenue and account balances, and get important business insights all in one place. Streamlining your finances with Novo can help you make connections between all of your financial data and figure out what’s causing your cash flow issues, whether it’s overspending or late client payments.
Novo also empowers you with the tools you need to fix common cash flow problems and get on better financial footing. Its debit card, for example, gives you instant notifications for every transaction to help you stick to your budget. Novo customers even get perks like $500 cash savings on Stripe. These discounts can reduce your operating costs and free up cash flow.
Get Out of a Financial Bind With Novo Boost
Even with proper cash flow management, you may still get into the occasional financial bind. Instead of taking out a loan to cover temporary cash flow gaps, you can take advantage of a new feature called Novo Boost.
It allows Novo customers to transfer money from Stripe to their Novo account up to two days early for free. Novo Boost can help you fulfill your financial obligations when you’re short on cash without taking on more debt or paying unnecessary fees.
Sign up for a Novo account today to start utilizing all of its helpful features from Novo Boost to special discounts and perks.