How Inadequate Cash Flow Can Strangle Your Business

Many new businesses start out well with a great product line, some working capital and a business plan for growth. Sales are brisk, interest is high and money begins to flow. Initial future projections look set to be quickly reached, and are optimistically extended with increased sales figures.

What happens next is an all-too-familiar scenario and, in fact, the ABS (Australian Bureau of Statistics) advises that up to 60% of small businesses fail within three years of commencement. A significant percentage of these failures is caused by inadequate cash flow.

Cash flow management is essential to the success of any business but many new owners do not understand its importance. When Carbon Group starts working with a new client it is one of the first financial health indicators we check.

Cash Flow Forecast

Every business should have a cash flow forecast, which is monitored and adjusted regularly to reflect real-time conditions. If properly implemented, a cash flow forecast will highlight when a cash shortfall is likely to happen so the business can plan to counter its effects. However, the forecast is just part of the solution.

Don’t Delay your Invoicing

Delays in invoicing cause delays in payment to the business which, in turn, affects cash flow. Even when payment terms are 14 days, if the invoice is not issued until 7 days after the work is finished, and the client stretches payment out by a further 7 days, it is now a full month before payment is received. Invoices must be processed promptly to reduce the time allotted between receipt by the customer and their payment.

Keep Debtors Under Control

While chasing debts is time-consuming, it must be a priority, as tight control of debtors will immediately improve cash flow. Offer customers nothing over 14-day terms if possible, and a discount for paying on time. Monitor those who consistently pay their accounts late. These customers should be contacted one or two days before their account is due for payment rather than the day after.

Establish a Safety Net

Even the most successful businesses have cash flow problems from time to time. For example, the week between Christmas and New Year is traditionally slow as many businesses close for the break. Arrangements for an injection of cash should be made well ahead of when it will be needed. A line of credit from a bank, a short-term loan or some other financial arrangement will allow the business to trade until the situation improves.

These are just a few suggestions for managing cash flow. We have a more comprehensive program available to our clients, so if a lack of cash is strangling an otherwise profitable business, contact us for an appointment.