Cash is like water. Just like your body needs water every day to survive, your business needs cash to stay afloat. Most business owners are good at selling their services or pushing product, but are less effective at controlling their cashflow.
Your business might be profitable on paper, but if the cash isn’t flowing in a steady stream then you may not be able to realise those profits. Without cash your profits don’t mean much.
“You can have the greatest business model in the world, but without a healthy cash flow your business simply won’t last,” says the CEO from Invotec, which helps businesses ease cash flow by converting their customer invoices into cash. “Fortunately, the common causes of cash flow problems are relatively simple to diagnose, and, in most cases possible to remediate.”
Here, then, are the five most common causes of cash flow problems:
1. Sales are pitching
Your sales are simply too low. There could be a general economic downturn, or maybe it’s just your industry that’s taking a hit. Perhaps competition is ramping up as a surfeit of new suppliers enter the market, giving consumers multiple, often cheaper, alternatives.
2. Trickle not a flow
Low profit margins are the slow death-rattle of a business. Quite simply, you are spending too much and generating too little. Perhaps you have over-invested in capital and equipment, or invested in the wrong sort. Maybe your prices are too low relative to your overhead costs. It’s possible that your entire business model needs a rethink.
3. Your timing is off
You pay too early and get paid too late. You pay your suppliers, staff, overheads, etc. promptly – sometimes even in advance – while offering customers extensive credit and easy payment terms – perhaps even extending to 90 days…
4. Too much of a good thing is not a good thing
Your stocks are rising. And in this case, that’s not a good thing. You have large inventories languishing in expensive warehouses. The stock that isn’t expiring or getting damaged is becoming obsolete. It’s time to offload.
5. It’s not personal, it’s business
You’re mixing your business and personal finances. It’s reached the point where you don’t know – or pretend not to know – the difference. Dipping into your business account on an ad hoc basis is never a good thing. Don’t fund your new Merc or that swanky townhouse through your business. Rather live within your means and let your business breathe and grow.
As a business owner or manager are you managing cash flow in an effective way? Do you know the risks facing your business if you don’t manage cash flow properly? What if a major client doesn’t pay you on time? Or a key piece of machinery is offline for repairs, and you don’t have the cash to pay your suppliers or your staff?
For more on these common cash flow problems and how to avert them, download our free eBook: “Water under the bridge: The secrets of effective cash flow management”
The eBook will help you to manage your cash flow more effectively – enabling you to take the necessary steps to avoid a cash flow problem before it becomes a crisis.