Cashflow problems? 7 reasons why
Cashflow is vital to the health of your business. It is said that 'cash is king' - businesses need steady cash income to be successful. Often even successful businesses struggle with this. Here are 7 reasons why business cashflow may be poor.
Poor collections = poor cashflow
If there is too much time between billing your customers and collection of these sales, money will be tight. The longer it takes your customers to pay you, the longer you are funding them from your own cashflow.
tightening Terms of Trade,
offering prompt payment discounts,
seeking deposits and/or progress payments as work is carried out
streamlining your billing process.
invoicing once work is completed, so that you can be paid as quickly as possible!
2. Not enough sales
Are you selling enough to cover overheads and other demands? If the answer is no then your bank account is going to suffer.
Calculate the necessary sales required to break even - this is the minimum amount you need to provide in sales of goods or services to cover your business costs.
Focus on what you can do to increase your business income :
what is your customer retention (do you get return customers, and how?),
how satisfied are your customers (what can you do better?),
how do you get new customers, what can you do get get more?
can you 'upsell' your sales or get them to buy more frequently from you?
is your pricing right? Check your pricing is covering your expenses and providing a good profit margin
minimise your bad debts - carry out credit checks on new customers, ensure payments are in line with your terms of trade, chase late payments as soon as become overdue.
3. Overheads are too high
Spending too much on your overheads is a sure-fire way to kill your cashflow!
Overheads are expenses that relate to the day-to-day running of your business. They are necessary to operate (i.e. things like rent, power, telephone costs) but are not directly related to a specific product or service your business sells.
review your overheads every year,
set budgets so you know what you are likely to need to spend for the next 12 months. Compare budget v actual at the end of each month,
review the effectiveness of any marketing you do - advertising is expensive so you need to ensure it is producing sales!
cut out non-essential expenditure.
4. Your accounts payable process means cashflow sucks
If you're not streamlining your payment process your spending could be hampering your cashflow.
make sure your customers are paying you before you need to pay your suppliers,
take advantage of prompt payment discounts offered by suppliers,
avoid late payment penalties by paying on time,
review all suppliers' terms - can you get better payment terms with them?
implement budgets for all of your outgoing payments.
5. You have too much stock and/or work in progress
Carrying more stock than you need results in using cashflow to have items sitting on your shelves.
Not invoicing soon enough leads to work in progress costs being carried unnecessarily.
Review your systems:
what level of stock do you need to maintain a steady stream of sales?
can you order from suppliers as required (just-in-time stock management system)?
can you invoice out all work completed by the end of each month so you are paid as quickly as possible?
6. Gross profit margins are too low
Have you reviewed what it is costing you to produce your products or services? Once you have covered your production costs is there enough margin left to cover your overheads, pay yourself and still have a good profit at the end of all of this?
Look at what could be reducing your margins - do you regularly have to do rework to complete a job, do you have a lot of wastage, what is productivity like?
Work on minimising the spending required to produce your products or services. The more efficient you are, the less you spend, the greater your cashflow!
7. Taking too much personally from the business cashflow
All too often business owners draw money out of cashflow without taking into account a forecast of what is needed to pay business expenses and taxes.
It is vital that budgets are prepared and cashflow forecasting is performed to ensure there is enough cash available to cover all expenditure. Business expenditure and taxation needs to be allowed for before funds are drawn personally.
Regular review of the year-to-date profits should be undertaken with your accountant to be certain that tax planning is adequate and no unexpected 'surprises' come at year-end.