Cashflow: Identify, Resolve and Avoid

The biggest cause of small business failures is running out of cashflow.

Cashflow is the lifeblood of any small business and keeping on top of the money flowing in and out is essential for a business to survive and thrive. You must be able to generate enough operating cash flow from your business activities to cover your cashflow needs, such as fixed asset and loans repayments. There are numerous reasons that can evoke a cashflow crisis and it is essential to be able to recognise them so you can identify, resolve and avoid them – keeping you out of trouble.

But often poor cashflow isn’t the actual issue, it’s a symptom of the issue. To get to the root of your cashflow challenges, and before you try to sell your way out of it or scream ‘we need more sales’, understand and review these three aspects.

Drilling down on these aspects of cashflow will help you identify what isn’t aligning and properly identifying and defining the issue is the first step to resolving it, as covered in this blog post.

Generating more operating cash:

Sales:

A key way to grow cashflow is increasing sales. Is the sales team producing the results they should be? Is the cost of your sales correct? Do you need to look at the structure and workflows of the sales team, perhaps an investment in process and procedures now could result in exponential returns over a fairly short time frame? Or should you consider a price increase?

Get the cash from your sales in faster: How big is your debtors list?

How much in outstanding invoices do you have each month? What strategies do you have in place to get payment on time every month? The cost of having a large percentage of your invoices unpaid each month could really be holding your business back. Have you factored in the time you or a staff member wastes on chasing bad debtors each month? Or have you considered prompt payment discounts?

Reduce the cash spend on expenses:

Know your margins:

Do you know which areas of your business actually turn a profit? Can you attribute specific costs and income to a particular service or group of products? Do you know your actual product or service margins? It may be that the perceived star of the show is actually costing you money to provide to your customers. It’s very easy to get focused on the final bottom line and it pays to drill down and find out why.

Operating Expenses

Review your outgoings, including your purchasing practices and arrangements with retailers, and simplify your process solutions. Cash often gets tied from poor buying practices, not monitoring shrinkage and excess inventory.

Other cash needs:

Financing:

When purchasing assets for the business, they tend to generate income over a long term for the business and so it makes sense that the debt for these should be somewhat matched, to free up cash for shorter term expenses. Examine your current financial plan and, if possible, opt for a long-term debt to help consolidate debt and refinance at a lower interest rate. Don’t borrow or buy assets that are not for the purposes of generating better business i.e. sales and ultimately cashflow.

Understanding the root of your cashflow issue will give you the tools to create a targeted solution. Cashflow is king in small business, so keeping it under control should be of paramount importance.