Cash Flow Management
Poor cash flow management can cause huge problems for even the most profitable businesses. Until you find and fix the cause of cash flow problems in your business then put systems in place for managing it, your company is at a very grave risk of failure.
For the stark truth is without cash, your business will be unable to meet its payroll obligations, be more likely to default on payments to suppliers and creditors, and in the worse case, be forced to cease trading.
Without well-defined and well-managed strategies to avoid running into cash flow management problems and a plan to improve cash flow if such problems should arise, many companies will flounder, yours included.
Introduction
It doesn’t matter if your product or service is outstanding, your market share is bigger than your competitors’, your team is highly productive or if you have a steady stream of new clients, your company is at risk of going under if you don’t have a firm grip on your cash flow. You might think you’re immune from danger because your business is experiencing a high level of growth, but you’re wrong: expansion can exacerbate the problems caused by poor cash flow management. Cash really is the oxygen on which every business depends. Without a steady supply of it, your business cannot survive. That applies even if your company is profitable. Business consultant Bill McGuiness says, “The sad fact is that the majority of failing firms are profitable as they enter bankruptcy.” Without clearly defined and well-managed strategies to avoid running into cash flow problems and a plan to improve cash flow if such problems should arise, many companies will flounder, yours included.
Cash flow management is not a short-term fix to a problem but should be part of the fabric of the business.
It is like an internal insurance policy for your business. Getting to grips with your income and expenditure and understanding where you stand today as well as in the months and years ahead gives you and the rest of your senior team a great sense of clarity and peace of mind. It also makes it easier for you and your team to plan and make decisions.
For that to happen, you need to analyse and then manage the flow of cash in and out of your company on a weekly, monthly, and annual basis. You also need to create a cash flow forecast for at least three months ahead so you and your senior team are aware of when cash shortfalls are likely to occur. This will allow you to cover your working capital requirements.
The Main Reasons for Cash Flow Management Problems
Essentially, your cash flow problems are likely to be the result of one or more of the following:
Slow-Paying Customers
When a customer doesn’t pay on-time, your business can experience cash flow management problems of your own.
According to PaySimple, the Bureau of Labor Statistics found that 53% of small businesses rank cash flow as their top business challenge. In the same article, PaySimple also cites a study by the National Federation of Independent Business, that “shows that the small business receivables cycle has grown 30% to 48 days over the last five years.”
And from a NYTimes article on the Top 10 Reasons Small Businesses Fail: Poor accounting. You cannot be in control of a business if you don’t know what is going on. With bad numbers, or no numbers, a company is flying blind, and it happens all of the time. Why? For one thing, it is a common, and disastrous, misconception that an outside accounting firm hired primarily to do taxes will keep watch over the business. In reality, that is the job of the CFO, one of the many hats an entrepreneur has to wear until a real one is hired.
Poor Collection from Debtors
Many companies don’t issue invoices quickly enough. They’re even worse when it comes to chasing up invoices. If this is the case in your company, it’s important to realize that every sale has already cost your business something in terms of, labor, purchase of raw material, warehousing, advertising, etc. If you don’t collect what you’re owed, you’ll be worse off than if you never made the sale. American entrepreneur Nolan Bushnell is fond of saying that a sale is a gift to the customer until the money is in the bank.
Your Fixed Costs Are Too High
If it is to survive, your business needs to bring in more cash than it spends. If it doesn’t, its long-term survival is unlikely. Three of your biggest fixed costs (expenses) are likely to be payroll, capital expenditure (equipment, hardware, and plant) and office costs.
Your Prices Are Too Low
It’s quite common for businesses to set their pricing levels at the low end of the market in a bid to win customers. If their expenses rise, their profit margins get smaller. Unfortunately, if they raise their prices, they risk alienating customers who have become accustomed to the low prices.
Your Sales Are Too Low
The way many business owners tackle the problem of low sales is to look for new clients. That inevitably incurs more costs since it involves spending more on advertising and marketing to attract those new clients. There are other more cost-effective ways of boosting sales. They involve encouraging your existing or dormant customers to spend more and to do so more often.
How a Fractional CFO Can Help You Resolve Your Cash Flow Management Problems
The CFO Centre will provide you with a highly experienced senior CFO with ‘big business experience’ for a fraction of the cost of a full-time CFO. This means you will have:
-One of the US’s leading CFOs, working with you on a fractional basis
-A local support team of the highest caliber CFOs
-A national and international collaborative team of the top CFOs sharing best practice (the power of hundreds)
-Access to our national and international network of clients and partners
With all that support and expertise at your fingertips, you will achieve better results, faster. It means you’ll have more confidence and clarity when it comes to decision-making. After all, you’ll have access to expert help and advice whenever you need it.
In particular, your fractional CFO will assess your company’s cash flow management position and take the following steps:
Identify All the Immediate Threats to Your Business
A fractional CFO will look for all those things that could plunge your company into serious financial trouble if they’re not addressed immediately.
These could be factors such as the payment of wages or salaries, the payment of taxes or the payment on a due date for vital goods, etc.
Address Those Imminent Threats
Your CFO will look for ways you can meet your most pressing financial requirements and buy the company more time. This might involve:
-Chasing late paying customers. To encourage those customers to pay, consider offering a discount for immediate payment or asking them to pay immediately by credit card.
-Hiring a company that provides invoice financing (either invoice discounting or factoring) so you receive an immediate cash injection. Such companies provide funding against your unpaid invoices for a fee.
With invoice discounting and factoring, you’ll receive up to 85% of the value of the outstanding invoice, sometimes within 24 hours. You’ll receive the remaining 15% minus a fee once your customer has paid the outstanding invoice.
An invoice discounting service can be confidential so that your customer will be unaware of the financier’s involvement. Factoring companies however undertake a full collection service (including sending out statements, making reminder calls and collecting payment), so your customers will be aware that you’re using their services.
Downgrading your drawings from the business until your revenue improves.
Looking for ways to increase your profit margins such as raising You can do this without losing valuable customers by offering packages or bundles of goods or services.
Arranging short-term loans or overdraft facilities with your bank.
Considering other funding sources besides banks and other lending institutions such as self-finance, or loans from family and friends, partners, investors and alternative finance like peer–to–peer lending.
Asking for better terms from You may find they’re open to extending your repayment schedule.
Identify and Address the Underlying Problem
Assess the business to identify the cause of the cash flow.
Address those issues to avoid a similar situation occurring again.
Speeding Up the Sales Process
Your CFO will encourage you to accelerate the speed with which your customers’ purchase orders are converted into cash. In particular, you’ll be asked to consider what steps in the sales process can be combined or eliminated. For example, asking for payment at the time of the order, accepting credit card payments, or offering automatic account debiting.
Lowering Miscellaneous Expenses
You’ll be encouraged to find ways to make small savings on things like insurance policies, office rent, bank service charges, utilities, etc. Lots of small savings across the board can have a significant impact.
Refinancing Your Debt Obligations
Your CFO might suggest approaching your lenders to see if you can lower your monthly payments on your term debt obligations by taking the remaining principal amount and spreading it out over a longer period.
Analyzing If You Can Outsource Jobs or Services
You’ll be asked to look at your operations to determine if any of your activities, services, or functions could be provided at less cost by an outside company or contractor.
Prevent Cash Flow Management Problems from Recurring
As well as identifying and resolving the imminent threats to your business, your CFO will review all incomings and outgoings to determine where improvements and savings can be made. This is likely to involve:
The beauty of cost-cutting is that it can be done in hours or days, unlike revenue-boosting measures which take longer to implement and to take effect. Such cost-cutting measures might include doing any of the following:
Working out your break-even sales figure (the amount of sales required to cover total expenses without making a net profit).
This will mean reviewing your sales figures for the past six months to check that you exceeded that breakeven. It’s then possible to calculate how much you’re likely to make in sales for the next two months. If you’re unlikely to break even, you’ll need to plan how to increase sales and reduce costs.
Instigate the Use of Regular Cash Flow Forecasts
Your CFO will encourage you to use regular cash flow management forecasts so you know how much cash is going to be needed in the coming months. It means you’ll know in advance if you’re likely to face a cash shortfall and can make arrangements for extra borrowing, or take other appropriate action.
It will also make it easier for you and your senior team to make decisions such as whether or not to:
Hire more staff
Change your prices
Move premises
Tender for a large contract
Find new suppliers
You’ll be able to see at a glance the impact such decisions might have on your cash flow. Cash flow management forecasts can also highlight potential problems so that you have time to take action to avoid them.
Conclusion
Your cash flow keeps your business alive. Having control of your company’s cash flow which allows you to operate within your means, and move away from a ‘feast and famine’ situation is usually a huge relief to everyone within the business.
It means that decisions can be made and checked against the cash flow forecast to determine whether they are viable. This increased visibility can be introduced quickly and can have a hugely positive impact on the whole business.
It also means that reserves can be built up gradually to give the business a cushion and alleviate the stress of not knowing what lies around the next corner.
Having the right cash flow management processes in place and being able to spot peaks and troughs in trading to improve cash flow is one of the most critical components of any finance function.
Find out more and book a discovery call on our Cash Flow Management Page