Cash flow can often have more to do with your timing than anything else.
Cash flow is the single most important concept in business.
Most people have cash flow problems at one time or another, but are what you perceive as a cash flow problem just a symptom?
When a cash flow problem emerges you should look for the symptoms. They show up long before your cash flow becomes a problem. The most common symptom being 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 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 with an understanding of the symptoms that indicate cash flow problems. Cash flow problems are the most common frustration of business owners and managers, particularly when they are in a growth cycle.
You shouldn’t use the short-term working capital to fund long-term assets. Working capital is for financing your day-to-day operating expenses.
“Happiness is a positive cash flow”. Fred Adler
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. https://www.paypal.com/au/home
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.
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 have worked with wanted 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 that was all they focused on.
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 into 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.
[read more=”Personal Experience” less=”Personal Experience”]
There is no growth without some pain and I usually found the pain in the form of a cash flow problem. Back in 1967, our machinery business had been going for about six months when we ran out of money. How could this be when we had sold so much and when we know so much about our industry?
It was suggested I fly to Melbourne and visit the Finance Director of one of our suppliers. He was a very practical man and he knew exactly what to do, he showed me what a ‘cash flow budget’ was and how to use it. What a revelation that was.
He also showed me how to really read a Balance Sheet and Profit and Loss statement to endorse the accuracy of my decision-making as well as showing me the benefit of having adequate working capital, which was another revelation to me.
That day gave me the tools that guided my thinking and our business through rural recessions, droughts, floods, the difficulties of commodity prices and dumping practices of the machinery manufacturers over the next thirteen years.
What stood out most was how he was able to communicate at my level without making me feel foolish, he was a rare man in those days, the likes of whom I have rarely seen since, particularly around smaller businesses. The budgets and figures that I had previously compiled, I might say with great care and worked with, suddenly became worthless.