7 Key Causes of Poor Cashflow
The 7 Key Causes of Poor Cashflow – often something that has been neglected and overlooked over the past two years while we’ve had all these good times rolling, that right now, it’s come back and is kicking many of us in the backside.
Find out more about this mindset below with Jason!
It is so important in our businesses to understand which one of the 7 causes of poor cash flow is either:
A) causing us to have poor cashflow in the here and now
or
B) is a risk to us having poor cashflow in the future.
Accounts Receivable Process:
How long is it between us doing some work and then invoicing it out and then getting paid? Have we got people that are paying us the 20th of the following month or any of that nonsense where we’ve done all the work and we are basically the bank of that client? Really, we need to understand how long it is between when we do work and when we get paid, because it may not be the right terms for us based on when we are then paying suppliers, contractors, and other people for that business. What can we do to shorten our debtor days?
Accounts Payable Process:
What are our terms for paying our suppliers in terms of the debtors? It may actually be that our supplier terms are actually terrible and we are hemorrhaging cash out to pay our suppliers at actually the worst time of the month for our business. So, are there options for us to spread payment? Can we do part payment or are there other times that it’s better for us to make those supply payments? Can we combine them all to be going out on one day when we know we are getting paid so we are not consistently having money coming in or coming out at different times?
Really understanding that money coming in through debtors and going out through creditors and seeing what we can do to try and make it more beneficial to our business, will make a big difference to our cash flow.
Inventory Process:
If you are selling products right now, it’s a really tough time, especially for businesses who last year couldn’t get products for love or money.
How long are we having our hard-earned cash sitting on the shelves? How much cash is currently in that warehouse because we are not able to move it out the door? How long is it taking us to pay the supplier for that inventory to then arrive and sit in the warehouse before going out to the customer? If it’s a long time how can we shorten that? Have we got some stock that’s just sitting out there completely dead? What can we do to get rid of it, to try and convert it into cash? Answering all those questions and really getting across your inventory management will go a long way to helping sort out that cashflow.
Inappropriate Debt/Capital Structure:
The next aspect to look at is our debt-to-capital structure. How much debt have we got on the business basically? A big issue for a lot of people with interest rates rising. What are the options we’ve got for those debts? Can we restructure them? Can we work with our lenders to find a solution, that’s better tailored to our business? Just going along and watching it cripple our business because the cash flow that’s going out or hemorrhaging out for that debt is not a great solution.
What options do we have if our debt capital structure is what’s causing our poor cashflow?
Gross Profit Margins Too Low:
What are the margins on our products? Are our margins enough that it’s actually keeping enough cash left over to pay for our overhead, pay for our debt and then pay us out the profit? Keeping an eye on margins is so important, are they high enough? If your gross margins are too low that’s going to be an area that’s going to cause some cashflow stress within your business.
Overheads Too High:
We also need to be looking at our overheads and really analyzing the spend that we are making. Do we need to be making the spend right now in ‘whatever’ area? What can we do to reduce that overhead spending without crippling the long-term growth of our business? We want to ensure that any money going out the door is an essential investment that we are making in our business.
Sales Levels Too Low:
Finally, and one of the most often overlooked aspects of cashflow issues and something that sadly I encounter all too often with businesses is…
Are our sales even enough to fund our business and our lifestyle? Are we just living beyond our means?
This may not actually be an issue with cashflow in the business. Quite simply we might have a mortgage or commitments or toys or holidays or whatever it is in our personal life, that’s requiring us to suck too much cash out of the business to fund it. This could be leaving your business high and dry without enough cash for it to grow. Have we done a personal budget? If we are on a salary, are we then dipping in and taking drawings as well? Just on drawings, how much are we taking out? Are we living beyond our means?
Work with us at SMYD Accounting / Advisory on a cashflow management plan, we will identify what is causing you to have cashflow stress and we can provide you with insight so you can start making proactive decisions. Please get in touch with us today to help you with any of your cashflow issues or concerns.