How do you know when you have a cash flow problem? Quite simply, it’s when you do not have the cash to pay your liabilities when due. There are many reasons why this may occur and each reason will have its own unique solution – there’s no “one-size-fits-all” solution to cash flow problems. Taking on debt and injecting cash into your business simply hides your problems until the cash runs out – you are then left with the same problem but you now hold more debt. Your aim should be to solve your cash flow problems by targeted solutions to targeted issues.
Some of the more common causes of cash flow problems are described below, along with potential solutions.
Profits lower than forecast.
This can be more than a simple pricing issue – has your product or service quality suffered as a result of diversifying your business in order to increase turnover? How are your sales tracking in comparison to your
margin? Do you need to focus on your core business and do less but do it more profitably, or do you need to diversify to increase sales?
What is the actual amount of cash coming into your business and how do you increase it? Your answer will be unique to your business.
Debtors not paying (on time).
Offering credit to customers is one way of building sales, but it comes with risk. If your business customer becomes insolvent prior to paying your invoices, not only will you not receive the payment due (and potentially incur expense chasing payment), but if they were a key customer your turnover going forward will be reduced. Then there is the risk of late payments – the statistics change with time, but in 2019 the average Australian business paid their creditors 10 days late.
Having systems and processes around identifying and monitoring your customers for credit-worthiness will help minimize the risk of trading with the wrong businesses. Timely and correct issuing of invoices, along with rapid follow up on overdue payments, will help minimize late payments form your debtors.
Should one of your key debtors become insolvent, a flexible invoice financing facility will allow you to bring forward cash from one or more of your other debtors so that your cash flow interruption is “smoothed” over a longer period and thus easier to manage.
Business grows too quickly.
When your business grows rapidly, it can be tempting to increase investments into expanding premises, adding extra staff and holding more stock in order to meet demand. However, committing a large amount of funds to expansion can put a strain on your short-term finances. In addition to the strain, there is risk of sales not meeting forecast, leaving you with increased overheads without the income to cover them. Furthermore, large stock holdings risks the stock expiring or becoming obsolete.
Business growth needs to be managed carefully, based on firm data, risk analysis and contingency planning so that your business grows in a controlled manner. Where the growth is solid and supported, a flexible invoice financing facility will allow you to bring forward cash from one or more of your other debtors so that you can quickly allocate cash to short term needs and “smooth” out your cash flow interruptions over a more manageable, longer period.
Unexpected changes.
Some events or challenges can’t be forecast – machinery breakdown, customer insolvency, accidents – you may need to take immediate action to overcome the hurdle, thus impacting on your short-term cash flows. Similarly, if your business won a large contract and needed to start immediately, your short-term cash flow will also be impacted.
Utilising a flexible invoice financing facility is one of the quickest and easiest ways to overcome these challenges. By having a “standby” invoice financing facility where you can elect what you finance and when you finance, you quickly gain control over when cash is injected into your business so that you can solve your pressing issue.
Understanding your current and projected cash flows is the first step in minimising costs and maximising your business’s growth potential. Our free cash flow forecasting tool (excel template) will help you manage your cash flows, plan for growth, and respond quickly to changes.
Would you like more information, or to talk to us about your cash flow challenges and how you could overcome them? Click the link below to connect with us.
