Cash flow is the life blood of your business. Without ready cash available, you can run into problems with suppliers, staff, bills – and it’s nearly impossible to grow your business. Poor cashflow is one of the main reasons why businesses struggle, and ultimately shut up shop after only a few years. But for many business owners the cause of poor cash flow can be difficult to identify. You can feel that you’re doing everything right and bringing in plenty of income, but still struggle to find ready cash when you need it.
That’s because cash flow can be affected by processes in every area of your business, which means there’s usually more than one factor affecting things. Your accounts, stock ordering, inventory processes – all these areas can influence your cash flow without your knowledge. If you’re having cash flow problems, identifying the cause or causes is the first step towards solving them.
Here are seven places to start looking:
1. Invoices and accounts – clients don’t pay you quickly
Your accounts receivable process could be slowing your cash flow. A poorly designed process, without strategies to speed up payment, can lead to a long wait between invoicing and payment. Money that should be in your account is sitting with your customer or client, which stifles cashflow.
Speeding up the payment process will help improve your cashflow. Depending on how your business works, you could try tightening your Terms of Trade to make your billing expectations clear; offering discounts or other incentives for prompt payment; improving follow-up processes for unpaid debts; or streamlining your invoicing. These strategies can help shave days or even weeks off the average time before you receive payment – and that could make a huge difference.
2. Bills and payments – when you pay your bills
Cashflow isn’t just about money coming in, it’s also about managing your outgoings. If you’re paying your bills late every month, you could be spending far too much on penalties. On the other hand, it can also cause problems if you always pay on the first of the month when you don’t receive payment from your clients until the 30th.
Improving your accounts payable process might mean speeding up your systems or using reminders to maximise prompt payment discounts. You can also ask for flexibility from your suppliers – they may be able to change your monthly billing date or offer an incentive for early payment. Reviewing your monthly billing can also reveal unexpected high cost areas, sometimes changing suppliers or vendors can make a big difference.
3. Stock management – too much old stock
The way you manage your inventory can be another cash flow dampener. If you have stock hanging around for long periods, your cash is essentially trapped – you’ve paid for the product, but haven’t received payment yet. Slow-moving stock also makes you more likely to offer discounts and reduce your overall profit.
Reviewing your ordering and stock control processes can make a big difference to cash flow. You may find some products aren’t worth stocking at all, some can be pre-ordered when customers want them, and others may need to be increased. You want product to be moving in and out of your warehouse or store quickly, so your cashflow keeps moving too.
4. Debt and capital – expensive or mismanaged debt
All debt is not created equal. If your business has existing debt, regular reviews of your lenders and debt structures can help you find ways to boost cash flow significantly. Similarly, looking at your capital can help you identify wasted cash – and opportunities for change.
Depending on your situation, monthly payments can be reduced by consolidating debt and paying it off over a longer term. Moving to a different lender could give you a lower interest rate or more flexible payment terms. In terms of capital, taking a look at what you’re drawing from the business can make a big difference – you may need to revise your salary. But it’s not always about internal processes - in some cases, funding growth may require a fresh dose of capital too.
5. Business costs - your costs are too high
Every business has overheads – rent, marketing spend, technology upgrades, printer ink and pens. Doing a thorough review of yours can uncover hidden costs and lost cash flow.
Although some costs are set in stone, others can be reduced. Look at the effectiveness of your marketing spend – are you getting a good return on every dollar? Going paperless or changing your technology platform can also lead to big savings, depending on your business.
6. Productivity and profit – you’re not maximising your profit
Profit margins are an obvious place to look for cashflow issues. Your gross profit margin is what’s left from your sales after costs are deducted. If yours is too low, you won’t be bringing in enough cash to keep the business moving.
Improving profit margins isn’t necessarily a quick or simple process, but it can be done. Strategies include working to reduce waste and rework; increasing prices; improving productivity on your teams; and finding ways to reduce stock loss and theft.
7. Sales strategies – you need to bring in more cash
Sales – whether of product or service – are the chief component of your business, and the source of most of your cashflow. If your current level of sales don’t match your costs – overheads, staff salaries, and other costs of doing business – then your business won’t last. If you’re simply in a growth period, you may need finance to tide you over. If not, you’ll need to boost sales.
Growing sales involves bringing in new customers, retaining existing ones, generating new leads, improving conversion, increasing the value of individual transactions, and looking at your pricing. Sales won’t usually improve overnight, but with the right mix of strategies, you should be able to slowly increase sales – and the money your business is bringing in.
Help with cashflow problems
Finding the cause – or causes – of your cashflow problems might be simple, resolving them is more complicated. It can be useful to get perspective and help from outside the business, as an outsider can often see issues you’ve missed. You need strategies that improve your cashflow long term to help your business grow.
If you’re keen to find out where your cash is going, our Cashflow Management Coaching service can help. We help you review your current processes, find areas to improve, and implement simple, effective strategies to maximise your cashflow.