A lack of cash flow is a very quick way to destroy a
business! No Cash = No Business. A lack of cash flow or a poor cash flow is a major
cause of stress for many business owners. It is important to note however, that
poor cash flow is a symptom and is not the cause. In order to solve your cash
flow woes, you need to get to the root cause of the problem, and solve that.
Here are some of the biggest causes of poor cash flow:
- Insufficient Sales to cover your expenses
and debt repayments
This means your business could be in a loss
making situation (or you could be making a profit, but your debt repayments are
too high). Some solutions to this problem could be:
- You need to know your breakeven point, ie how
much sales do you need to bring in each month to cover all your expense commitments.
- You need to constantly keep track of your
numbers so you know where you are financially throughout the month, not just at
month end. Ensure you are running management accounts for your business every
- Sales is a function of two things: leads and
conversion. Leads is marketing and conversion is sales. You need to ensure you
have a solid marketing plan in place to deliver sufficient incoming leads.
- You also need to have some strategies in place
to improve your conversion rate, to get your customers to come back more often,
and increase their average transaction value.
- Outstanding Debtors
You have completed the work or
delivered the goods but now your customers are not paying timeously. Some solutions to this problem could be:
- Implement a robust collections process that is strictly
followed and adhered to. Do not only follow up outstanding money when cash flow
is tight, follow up debtors systemically.
- Keep track of your average debtor’s outstanding days.
If your terms are 30 days but your average is say 48 days, then you have a
problem. Hold customers to their terms.
- Ensure a rigid credit vetting process to ensure the
customers are good for the credit in the first place. Don’t extend credit to
anyone who hasn’t passed your process.
Too much stock on the shelf is
not a good idea as you have paid for that stock and its sitting collecting
dust, unnecessarily tying up your cash flow. Some solutions to this problem
- Implement a re-order level stock system.
- Identify and sell off slow moving or obsolete
- Ensure sufficient controls are in place for
ordering of stock so that you only order what you really need, when you really
- Excessive Personal Drawings
Ensure you are not being a cash
flow drain on your business before it can afford the level of drawings you are
taking. Some solutions to this problem could be:
- Don’t live beyond your means.
- Only buy what you can afford.
- Draw up a personal budget and stick to it.
- Ditch the expensive car! (Unless you really can
GUEST AUTHOR BIO
Darryn Le Grange
Darryn is a registered Chartered Accountant and internationally certified Business Coach.
From humble beginnings, Darryn is most proud of the fact that he worked and studied part time to fund his studies and qualified as a CA through sheer hard work and determination.
ActionCOACH is recognized as the Number 1 Business Coaching Franchise in the World with a proven system to grow businesses. There are over 1,000 ActionCOACH franchises globally.