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Anywhere in the world, whether you are in South Africa, Australia, UK, US, or elsewhere, the causes of cash flow problems are the same!
CASH IS KING
- A positive cash flow is essential for any business to be operational in the long term.
- Surplus cash flow allows for growth of a business.
- To successfully grow a business, it must be both profitable AND generate surplus cash flow on a continual basis.
- Inadequate cash flow is the symptom of management problems in a business, NOT the cause.
Confirmation of Cash Flow Problems
- Late payment or non-payment of supplier invoices, bounced debit orders, late payment of taxes and employee benefits, even worse, late payment of wages to staff.
- Any legal action against your company by suppliers or the tax office.
- You are stressed and it is affecting your family as well.
If these problems sound familiar in your business, you must take immediate action to address your cash flow problems.
In this article, we look at the 5 Main Causes of Cash Flow Problems in a business.
Cause 1 – Declining Sales and/or Declining Gross Profit Margins
- a) Declining Sales
- Declining sales have a devastating effect on your cash flow as a relatively small decline in sales can cause a massive reduction in your profitability.
- This typically occurs when economic conditions deteriorate, there is an increase in competition, new competitors enter your market, or your industry declines.
- As sales decline, overheads will probably remain constant so net profit decreases rapidly.
- b) Declining Gross Profit Margins
- Declining gross profit margins have a devastating effect on your cash flow as a relatively small decline can cause a massive reduction in your profitability.
- Typically occurs when there is pressure on sales.
Cause 2 – Your Business Is Unprofitable
- Simply put, your expenses are higher than your sales.
- Your losses start to accumulate to the point where you might have to borrow more money just to stay in business. If you get to the point where it is neither wise nor possible to borrow more money, you will have to sell your business, close it down, liquidate it, or someone else will liquidate it for you.
- A much better solution would be to take immediate action to restructure your business to generate strong and sustainable profits.
The main causes of an unprofitable business include:
- A flawed business model.
- An underperforming business, either your sales & marketing and/or operations are not working correctly.
- Lack of understanding of financial statements.
- Lack of accurate and timely financial statements.
- Lack of KPI’s (Key Performance Indicators) and strict monitoring of these
- Low gross profit margins due to high direct costs and/or not charging enough for your products/services and/or extreme competitive industry pressures.
- Poor performance and lack of productivity of staff.
- Poor processes, many errors/defects.
- Poor stock purchasing and management.
- Excessive overheads.
- Excessive interest and/or vehicle and equipment finance commitments.
- Poor credit approval of customers and poor debtor collection management practices resulting in high bad debts experience.
- Undisciplined spending.
Cause 3 – You Have a Natural Negative Cash Flow Business Model
- You sell on credit terms, 30, 60, or even 90-day terms, but you have to pay your payroll, rent, overheads long before you are paid by your customers. And your payment terms with your suppliers are shorter than the payment terms you have given your customers.
- You carry imported stock which you have paid forweeks or months before it lands in your warehouse.
There are ways to address these circumstances which involve redesigning your business model and using appropriate means of financing, most of which are still available, even if you are already in financial distress.
Cause 4 – Excessive Debt and Capital Expenditure and/or Excessive Personal Drawings/Benefits
- High repayments due to excessive debt and/or repayment of loans over too short a period. This especially applies to vehicle and equipment loans and lease repayments which are typically structured over relatively short terms with low or nil balloon or residual values.
- Capital expenditure funded out of cash flow instead of being financed over the useful life of the asset which puts pressure on cash flow.
- Funding purchase of personal property assets or the repayments on these properties far beyond the capacity of your business to sustain these payments as well as meeting the ongoing payment of all business expenses within normal trading terms including taxes.
- Excessive living and lifestyle expenses.
Cause 5 – Poor Stock or Poor Credit and Debtor Management
- Poor stock management, such as carrying stock that doesn’t sell, carrying excessive levels of stock, not clearing discontinued or obsolete stock, poor demand planning, undisciplined purchasing habits, or a poor stock management system.
- Poor credit management, that is no or poor credit approval processes before providing customers with credit which will eventually result in bad debt write offs and in the worst cases will result in failure of the business.
- Poor debtor management which includes lack of disciplined collection of debts due by customers, allowing continued credit when customers have not paid their bills within company credit terms, and lack of regular reconciling of debtors accounts.
- Disciplined cash flow forecasting and management is critical to your business.
- If you are experiencing some of the above issues in your business, you need to address them urgently.
Unless you can address these problems immediately you may need an alternative way to increase your cash flow.
Flex Capital offers a fast, effective invoice discounting solution that injects cash flow into your business.
We also offer Structured Finance and PO Funding options.
The source of this article can be found here.