- August 26, 2019
- Posted by: dadmin
- Category: Finance & Margins
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 month.
- 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 could be:
- Implement a re-order level stock system.
- Identify and sell off slow moving or obsolete stock.
- Ensure sufficient controls are in place for ordering of stock so that you only order what you really need, when you really need it.
- 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 afford it)