In an era of ever-evolving economic landscapes and uncertain market conditions, maintaining a robust and prosperous financial standing is vital for any organization’s survival. At the forefront of this crucial task is the accounting team responsible for safeguarding your company’s fiscal well-being. Central to their role is the relentless pursuit of identifying risks to income – an indispensable practice that enables businesses to anticipate potential threats, seize opportunities, and navigate the unpredictable tides of financial uncertainty.
Regardless of your size or industry, when you partner with our accounting services team, identifying your risks to income is one of the first things we do. It is part of our commitment to being a trustworthy partner and consultant. We do more than manage your books and financial reporting. We help you find stability and scale. This involves pointing out potential flaws in your process. Below are some of the most common risks to income our team has seen and how best to avoid them.
The most common risk to income that businesses may face is becoming overly reliant on one specific client or customer. A single income stream can be dangerous if that client or customer decides to end their business relationship with your company. The market is unpredictable and subject to potential disruptions, cyclical trends, regulatory changes, and external shocks, any of which can have detrimental effects on a solitary income source. Even the most loyal customers are not immune from disruptions that may cause them to part ways with your organization.
Diversification allows for multiple revenue streams, helping businesses enhance their financial resilience, adapt to changing circumstances, and secure long-term sustainability. Diversification may mean expanding your customer base and reaching into untapped markets for new customers. However, there are a few other ways businesses can diversify their income:
- Expand Product or Service Offerings: Introduce new products or services that complement your existing offerings or cater to different market segments. Doing so allows you to tap into new customer bases and generate additional revenue streams.
- Develop Strategic Partnerships: Collaborate with other businesses that have synergies with your operations. Strategic partnerships can lead to joint ventures, licensing agreements, or distribution arrangements, enabling you to access new markets or leverage the expertise and resources of your partners.
- Develop a Recurring Revenue Model: Create a recurring revenue model, such as offering maintenance contracts, subscription-based services, or software-as-a-service (SaaS) solutions. These models provide predictable and consistent income streams over time.
Ideally, most industries should have a turnover rate of about 5 to 6, meaning inventory is turned over every two months. (There are calculations you can use to figure out your turnover rate.) A turnover of 9 or 10 may mean you’re not purchasing enough stock. One of 1 or less means your income is at risk from high holding, or storage, costs. You also have to worry about:
- Capital Tie-Up: Slow-moving inventory occupies valuable space and ties up a significant portion of a business’s capital. The longer inventory sits idle, the more financial resources are locked into products not generating revenue. This limits the availability of funds for other critical business operations, such as purchasing new inventory, investing in growth initiatives, or meeting financial obligations.
- Obsolescence: Consumer preferences, technology advancements, or industry trends may shift, rendering slow-moving inventory undesirable or irrelevant. This can result in significant losses as the business may have to sell their stock at discounted prices or even write it off as a loss.
- Cash Flow: Delayed revenue from stagnant inventory makes it hard to pay suppliers, creditors, and employees. Insufficient cash flow can hamper day-to-day operations, limit business growth, and hinder the ability to seize strategic opportunities or navigate challenging economic conditions.
Incentives, promotions, and bundling strategies may help move some of this inventory. However, an accounting team like KDG’s will also look for ways we can help improve your demand forecasting and suggest pricing strategies to help your inventory turnover rate get back on track.
Over 40% of US businesses say they don’t get paid on time by their clients. Outstanding payments are a serious concern that most businesses face. Collecting payments on time ensures a steady cash flow; meanwhile, late collections can slow down growth by making it hard to cover day-to-day operations like payroll, creating working capital shortages, and even leading to borrowing and interest payments. Your business may face a lowered credit rating and miss out on growth opportunities.
Reminders and updated invoices are friendly ways to encourage payment without damaging a client relationship. But what if a client is always overdue on their payments? Have a conversation and ask why they are not paying. In some cases it could be forgetfulness or economic hardships on their end. In other cases a client may be unhappy with the services they have received. Payment plans or subscription services may help you forecast income more predictably. However, if all else fails, it is time to take the client to collections.
Inflation has been a significant concern for businesses over the past several years. While businesses cannot control periods of inflation, they can control how they react to this economic uncertainty. There are several strategies we encourage businesses to employ if their income is at risk due to inflation, including diversifying investments, considering inflation-protected securities, adjusting pricing and cost structures, implementing effective risk management practices, and seeking professional financial advice to mitigate the impact on income and financial stability.
From helping you monitor cash flow to building forecast reports for your inventory, we can help you reduce the risks to your income and plan financial strategies sure to set you up for success. We encourage you to contact KDG today to learn more about our accounting and consulting services.