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When you’re running a business, cash flow is your lifeblood. When it’s flowing nicely, you can thrive and grow. When it dries up leaving you without the funds at hand to manage your day-to-day expenses, your survival is in question.

 According to a 2015/16 report by the Australian Securities and Investments Commission (ASIC), inadequate cash flow or high cash use is reported as one of the major reasons for business failure (4,318 or 46% of 9,465 cases).

In order to avoid becoming one of these stats, it’s critical that you identify cash flow problems early and take swift action to get your liquidity pumping again.

Cash flow basics

 First things first, what is cash flow? It may seem like an obvious question, but it’s surprising how many business owners get confused. Most importantly, it’s not just about profit and loss.

In its simplest terms, cash flow refers to the amount of money being transferred in and out of a business. It factors in everything from accounts receivable, inventory and accounts payable to capital expenditures, borrowings and timing discrepancies.

If you have more money coming in then going out, your cash flow is positive. If the reverse is true, your cash flow is negative.

Identifying the negative

 Cash flow problems are usually pretty easy to spot – from struggling to fund the day-to-day running of your business and pay supplier invoices, taxes, superannuation or even wages to stress and/or sleepless nights due to financial pressure and rumination.

If legal action is being taken against your business, the cash flow danger horn has well and truly sounded.

What happened?

Small to medium-sized business are most at risk of running into cash flow problems.  However, liquidity issues can hit companies of all sizes, for a wide variety of reasons.

These include:

  • Poor business management/flawed business model
  • Declining sales with static overheads
  • Lack of timely, accurate statements/understanding
  • No KPIs or monitoring of them
  • Ineffective sales and marketing
  • Low gross profit margins
  • Poor inventory management
  • Inefficient processes
  • Unproductive or underperforming staff
  • Excessive overheads/debt
  • Undisciplined spending
  • Lengthy customer credit terms
  • Poor credit and debtor management

Let’s be positive

If you’re facing cash flow problems, getting out of them can seem hopeless but is entirely possible if the right actions are taken to address the underlying causes.

Here are some suggestions:

  • Create a cash flow budget – this is a prediction of your business’s incomings and outgoings, usually over a 12 month period. Calculations should be based on your recent financial statements.
  • Prioritise payments – if a creditor or supplier has given you 60 days to pay, don’t rush to settle any sooner. In addition, pay the bills that hold the most severe consequences for non-payment first.
  • Avoid penalties – this means always paying your bills, such as credit card or ATO payments on time to avoid accruing further debt.
  • Shorten your credit terms – while it may have been standard practice to offer 60 days in the past, 30 or less is perfectly acceptable in today’s market.
  • Manage your debtors – make sure your customers are fully aware of your payment terms and when their next payment is due. Send them timely email or SMS reminders or chase them up with a call.
  • Get your employees on board – turning negative cash flow into positive requires a company wide effort. So ensure staff are fully informed of the ways in which they can individually reduce costs.
  • Create a strategy to increase revenue – if cutting expenses isn’t enough, think of ways in which you can increase revenue. For example, retrain your sales team, adopt new marketing strategies or target a new customer segment.

Making the impossible, possible

Cash flow problems may seem insurmountable when you’re on the inside looking out. However, with the right actions taken at the right time, it’s possible to turn your lifeblood from negative to positive.

If you’re struggling to get on top of things, contact Rapsey Griffiths today to find out more about our cash flow management solutions.