Invariably, most businesses will go through a period of cash flow difficulty.
It could be because of the business growing too fast, with expenses to assist in servicing the growth outweighing income and returns.
Or it might be because of a downturn in the business sales and/or as a result of other external events interrupting the normal flow of business performance (e.g. COVID19, industry demand downturn or seasonal fluctuations).
Either way, cash flow can be constrained and lead to significant difficulties in funding the short-term operations of the business (i.e. meeting all the main obligations and commitments) and severely impacting the growth path of the business.
Often a constrained cash flow can be made worse by the management and timing of payments to suppliers and receipts for services, the level of inventory and cost in holding this inventory, and finance available for working capital.
Actions/remedies/tips:
1. Understand the forward plan
Take steps to understand your cash flow position 3–6 months out and so on. By definition this means you need to understand where you are currently.
Ask yourself:
- how much cash is in the bank;
- what are your debtors like;
- what are your creditors like in terms of aging profile;
- what is your level of business today and moving forward in the immediate period, and how is that going to impact your working capital position?
Look at the forward outlook and ask:
- what is going to happen in the next 1–3 months in terms of business activity i.e. what’s the likely level of sales / what projects are coming up;
- have I got enough physical materials / labour / other resources to complete those projects;
- how does that impact the financial resource within my business?
Having that forward focus immediately helps you deal with cash flow.
2. Focus on the cash flow levers
Apart from looking forward and proactively planning your cash flow requirements, make sure your business and its key people are focusing on the levers to cash flow – for example:
- the timing of payments
- efficient collection of receipts, and
- the level and quality of inventory holdings.
Related resources
Tips to improve financial and operational performance
Business systems and processes
Cash flow management for small to mid-sized businesses
Managing cash flow and working capital
How to give your business a strong forward outlook
This blog comes from our ebook: How to overcome 6 business pain points. If you need support dealing with pain points in your business, we’re keen to help you. Feel free to get in touch by calling 02 6360 0360 or 02 9893 1803 for a confidential, obligation-free discussion.
