Cash flow problems mainly symptoms

Cash flow problems should not surprise you

Is what you perceive as a cash flow problem just a symptom?

Most people have cash flow problems at one time or another. When this occurs look for the symptoms. They show up long before your cash flow becomes a problem. The most common symptom is a drop off in sales, a string of slow paying customers, an inventory full of slow moving or dead stock, or a yard full of obsolete equipment rusting away.

Cash flow is the single most important concept in business

Cash flow problems can destroy a business faster than most other issues. Your cash flow problems can creep up on any business, but smaller businesses are usually the most vulnerable.  Without adequate working capital, you can find it difficult to quickly adapt to today’s ever-changing business pressures.

Fortunately, cash flow problems aren’t entirely out of your control and they’re predictable. You can avoid many sleepless nights by an understanding of the symptoms that indicate cash flow problems. Cash flow problems are the most common frustration of businesses, particularly when they are in a growth cycle. 

Don’t use the short-term working capital to fund long-term assets. Working capital is for financing your day-to-day operating expenses.

Too many ageing debtors affect cash flow

Extending lines of credit to your customers is one thing, but if they’re not paying you promptly, what’s the point? While, your debtors, or accounts receivables may be high because of increasing sales, you don’t have immediate access to the cash.

When your accounts receivables are high, you’re essentially giving your clients interest-free loans, you’re acting as their banker. Perhaps it is time to change your terms of trade use facilities such as PayPal.

Everybody delays payment of their accounts at some time. This can be a warning sign so keep an eye on overdue debtors, ensuring your collection process is working. Always remember a bad debt comes straight off your bottom-line net profit.

Cash flow is eaten up by excess inventory

Inventory only facilitates you making money by providing good customer service. You may like to have a big inventory in order to accommodate orders of all sizes, but you need working capital to afford this luxury. If your capital is tied up in that inventory and your customers don’t appreciate it, your business may struggle with cash flow until sales are made.

It may be worth revising your stock carry, ordering cycles, ordering quantities by upgrading your inventory control systems and logistics. Having dead stock is like leaving cash lying around until it blows away.

Underused or obsolete equipment ties up your cash 

Most businesses have old obsolete or unused plant and equipment stored for some reason. It simply clutters up facilities and any cash raised in its disposal can be better utilised.

Just like dead stock in your inventory takes time and money to hold on to, as does plant and equipment.  Sell it off for whatever you can get for it and direct that cash into more productive avenues. 

Declining sales will quickly impact your cash flow

Sales can quickly decline when the economy takes a dive, or a new competitor arrives on the scene, or there are product shortages, or your best sales person leaves the business. Whatever the cause the cash flow will also deteriorate.

If you can’t trim your overhead costs or expense, declining sales may indicate cash flow problems are just around the corner. To combat declining sales, you may want to adjust your marketing strategies. Today’s technology-driven world will continue to put downward pressures on your sales, so there is little time for procrastination. 

Poor margins lead to poor profits, then poor cash flow

If your margins are poor and your expenses are rising, there will be an immediate impact on your cash flow and profits. Low profitability generally means there will be poor cash flow at some point in the not too distant future.

Finding yourself in such a position, you might want to re-examine your pricing strategy. As well as competitive advantages, to see how they can be changed to enhance profitability and cash flow.

See if you can lower your expenses and increase productivity at the same time as a first step. Increasing your prices  is not the end of the world. Those businesses who sell on price alone are in a race to the bottom, don’t get caught up in it.

Increase the prices of your products and services according to the features and value you offer your customers. Take into account the customers problems, frustrations, wants and needs.

Growing your business too fast can be dangerous

When your business is growing too fast, the inadequacy of working capital soon shows up in the deteriorating cash flow. Often, before you realise you have cash flow problems and the business is out of control. If your business is in a growth phase, ensure you are working with accurate budgets to avoid surprises. If you are not confident in preparing and managing your cash flow budget, seek immediate help.

While many see a budget as a method of worrying before they spend money, as well as afterwards. They also feel that whatever happens is inevitable and beyond their control. If you feel this way, or you are in any way negative towards your cash flow management seek immediate advice. Otherwise, you are taking unnecessary risks. The cost of seeking external help for your cash flow will be minuscule compared to the costs of not doing it. It might even save the business from a complete financial breakdown. 

Ensure your business grows at a consistent rate you are able to manage. Fast growth requires extra capital for debtors, inventory, new machinery and general operating expenses. If you don’t have the capital, be very careful about how fast you grow your business. While a budget tells you what we can’t afford, it doesn’t keep you from spending. Maintaining a good working budget to produce the results you want requires discipline.

Avoid cash flow surprises

Plan your capital requirements, prepare accurate budgets and update your business plan well in advance. Ensure your business model is one that works well, all day every day, in order to avoid surprises. Focus on making sales first, raising capital second.

If you do this well, you might just avoid having to go into more debt. Do you feel you are not going to be good at handling the financial aspects of the business? If so your time may be much better spent taking control of opportunities that will increase revenue and profits, rather than sweat over the money. Outsourcing to financial advisors, bookkeepers and accountants can also be very cost effective.

Take time to evaluate your systems and business processes to see what needs to be improved, or tightened up. Have confidence in your systems and processes, ensure they keep working even when things get tough. Harness your strengths and take the actions that will rid you of cash flow problems forever.

Just because your business is making good profits is no good reason to start spending. The more you put money back into the business, the faster you’ll be able to grow and the more profitable your business could become in the future. Building financial reserves can eliminate your cash flow problems forever. A penny here and a dollar there, placed at interest, goes on accumulating. In this way, the desired result is attained.

Many businesses fail because the owner wasn’t willing to invest sufficient working capital. Others were surprised because they weren’t educated on the difference between spending money frivolously and investing money into the business for growth. Many others fail, not because of a lack of assets. By not understanding the risks and rewards associated with cash flow it can be playing with fire.

Focus on the important cash flow areas

Having positive cash flow in a business during changing economic times is critical if you want to stay in business.  A large portion of business owners we work with want to grow their business in revenue and in customer numbers but a large number of these would go into a negative cash flow slide if they did this.

If you experience cash flow problems, it could be severely hindering your ability to grow and expand your business while maintaining sustainability. Yet cash flow is one of the easiest areas to control and improve as you are only dealing with a few critical things:

  • Sales budget – Sales fixes most cash flow problems. Work with a realistic budget and focus on the processes that will improve profitable sales.
  • Expenses – How easy it is to spend money. Focus on cutting expenses you can do without and expenses that will drive sales and profit growth.
  • Pricing – If your pricing is wrong you could sell yourself into oblivion. Ensure your margins are adequate to meet your goals.
  • Accounts Receivable (Debtors) – Never let this area get out of hand, people will use your money if you let them.
  • Inventory (Stock) – How quickly you can build up dead and slow moving stock at the expense of fast moving stock. Get rid of it as quickly as possible.
  • COGS (Cost of Goods Sold) – Know what it costs to put your product or service in the hands of a customer and be paid well for it.
  • Accounts Payable (Creditors) – Look after your creditors and they will look after you. They won’t want to lose someone who pays on time.

Quotable quotes

“Happiness is a positive cash flow”. Fred Adler

“Number one, cash is king… number two, communicate… number three, buy or bury the competition” Jack Welch.

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