Now more than ever it is critical for your business to address the causes of its cash flow issues. There is a danger that unsustainable businesses are being propped up by the current availability of government stimulus, Reliance on stimulus payments is a short-term solution. A band-aid fix, ignoring the treatment of the real problem.
In the same way that you will run into critical health problems if there are interruptions with the flow of blood through your body, your business relies upon cash flow as the "blood" flowing through your business. You need a steady and constant supply, or things rapidly break down.
Healthy businesses have healthy cash flow. That's why it is a priority commonly identified by business owners - from sole traders to large national organisations.
"Never take your eyes off the cash flow because it's the lifeblood of business." - Sir Richard Branson
Many businesses were already suffering from poor cash flow leading into the COVID-19 period. With their businesses already strained and under pressure, how could they survive?
If your business doesn't have a steady cash flow, you need to take urgent attention before it creates more serious problems.
Struggling with Cash Flow right now?
Cash flow is the amount of cash available to your business: the difference between the cash paid and received in your day-to-day activities. That's the actual money you pay suppliers and receive from your customers, rather than the 'promises' of money associated with profit.
Even the most profitable business will have periods when cash is leaking or, worse, there is no just no cash available.
But if your business is struggling with cash flow right now, chances are you may have already:
- Stretched your payment terms to their limits
- Jeopardised your relationships with suppliers
- Damaged both current and future supply arrangements
Further payment delays could have even more drastic consequences.
The first step to fixing your cash flow problem is to identify the cause(s). It (or they) may not be obvious - again like health problems. They need a diagnosis.
The most common and most obvious causes of cash flow problems include:
- Customers not paying you
- Lack of sales revenue
- Overcommitting on purchasing or capital acquisitions beyond the business current working capital
But your cash flow problem could equally be due to:
- Selling your products or services at too low price and not making enough profit on each sale
- Not managing cash flow efficiently
- Paying higher interest costs from short-term or additional borrowing (using the wrong types of finance to make purchases)
- Underlying problems with your business production, sales, and management processes that interrupt the flow of payments from customers
- Too many customers who become delinquent, end up bankrupt, or simply 'disappear'.
It could be one or a combination of these factors. Either way, you need to identify what's causing the problems; and then treat the cause, not the symptoms.
Temporary 'band-aid' solutions, in the form of Government Stimulus payments, may stop the bleeding for a while but, until you find out what's causing the bleeding, the problem will keep coming back. Or worse, when the stimulus payments end, will it also be the end for your business?
You need to ask stark questions about your business. This can be challenging for a business owner.
What's the real reason your sales have stopped or your customers aren't paying?
Why are your profits decaying?
Struggling businesses often think the solution to fixing cash flow is to get a bank loan straight away. This could do more harm than good, and obligations for repayment of funds borrowed with interest can place even more strain on cash flow unless you fix the problems and manage cash flow better.
First, bear in mind that an important step in establishing healthier cash flow is to manage what you've already got much better...
Smarter Cash Flow Management
First, ask yourself:
- What's your cash flow target?
- How much does it need to improve by and when?
- How much cash do you need for regular business outgoings each month?
Then start some basic cash flow management steps:
- Work on reducing your debts
- Set up cash flow projection and targets for how much you want to reduce your overdraft by - and when identify the extra sales revenue you need:
- Each quarter
- Each month
- Each week
- Review your process for collecting payment from customers
- Commit to an up-to-date and fully reconciled accounting and financial system
- Prepare and review monthly financial reports and Key Performance Indicators.
Within your business, your cash flow status is an outcome of all your other business systems and processes. How healthy are they?
Your next step is to get an assessment of how healthy your business and your cash flow position is. Then map out how you're going to address the priorities and transform your business into the stronger, more profitable business you want it to be.