The 7 causes of poor cashflow
The 7 causes of poor cashflow. Cash is the life blood of any business. In fact, even profitable businesses can and do fail because of poor cashflow. What’s important is that you understand your key drivers of cashflow. Improving cashflow is often all about changing your business’s processes, for example, how you order stock and pay for it, how you bill for your services, and how you make sure you get paid by your customers. Don’t treat the symptoms of poor cashflow without fixing the underlying causes! Inadequate cashflow is a symptom of management problems in a business, NOT the cause. In order to fix these underlying causes, you need to make the necessary changes to your processes. By making these changes, you will build a much better and valuable business, as well as improve your cashflow. While there are many causes of poor cashflow, most relate to one or more of the following seven categories. 1. Your cash lockup.This is the cash that isn’t in your bank account because it’s locked up in work in progress (work you’ve done but not yet billed for) or you’ve billed your customer but are waiting for payment. 2. Your accounts payable process.If you don’t have spending budgets in place and aren’t taking advantage of the best possible supplier terms, your cashflow will be impacted. 3. Your stock turn.If stock is moving too slowly, it will take longer to turn the stock you’ve already paid for into cash. 4. The wrong debt or capital structure.For example, if your loans are being repaid over too short a term, this will place a big strain on cash reserves. 5. Gross profit margins are too low.Your gross profit margin is what’s left from sales after variable costs are deducted. If it’s too low, it won’t be enough to cover fixed expenses and your drawings from the business. 6. Overheads are too high.Every business should do a thorough review of its overheads each year. 7. Sales levels are too low.If sales levels don’t support cash demands on the business, then sadly, the business is not currently viable. “If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction, and cash flow.” – Jack Welch
Forecasting: Focusing on Your Business’s Future
Previously on this blog we discussed Profit vs Cash Flow. However, here at MHCo we don’t just look at what your business is doing but also where it is going. The new era of accounting is here, and looking forward is the new black. So don’t hesitate to reach out if you want to know more! MHCo is excited to now be able to offer this option to you. But why should you worry about forecasting? Is it worth it for your business? Listed below are a few reasons we think forecasting is the next step to take. Outlining the Future As a company sometimes we can feel like we are fumbling into the dark, just focusing on taking one step at a time. Though forecasting isn’t a crystal ball it does allow us to shed some light on what could be coming our way. Now, we can plan the steps we want to take further down the line, and sidestep obstacles that potentially could set us back. Having an idea what the future could hold allows us to plan for it. A lot of our business decisions are based on cash flow. This means we need to know what we will have in the future, not just what is in the bank short term. Money may be looking healthy now, but what about that slow spell that is probably hitting in six months? Will you still be able to afford the repayments on the new business car then? Is business busy, but you think you can’t afford a new employee? What is the cost of not being able to take on extra work in the next few months; is that revenue worth a tight belt on your budget for the short-term? Your forecast is based on prior performance. So as time goes on, how is your business matching up to the trend it has been showing? Forecasting is a good way to keep you accountable, and to challenge yourself. Underperforming? Pinpoint the catalyst that has caused this change. Sales picking up? Identify why – has your marketing finally reached the right ears? Is it word-of-mouth? Or is it a social trend causing it to take off, and how can you make the best of this while it lasts? Does your forecast not show the growth you were expecting? What area is slowing you down and what can you do to minimise its impact? Maybe it is simply not having enough cash on hand to prepare for a period of high demand, and so not being able to deliver. Or is it that you are under-pricing your services, and suffering because of it? Forecasting allows you to see the long term consequences of problem areas you may not yet be aware of. Financing Your Future Before loans for large sums of money can be arranged, banks and other entities require you to provide a forecast for your business. They need to know you will have the means to pay off what they lend you, and that they are not pouring their funds down the drain. So if you need finance for whatever reason, talk to us about preparing a forecast for your application. And just remember… Debt doesn’t have to be a bad word. Forecasting doesn’t mean just showing you one future. As we all know, the future is unpredictable and many things can change it. If you are thinking about employing another person, see what it might do to your cash flow. What if you want to pay that loan off a bit faster? Can you afford it, or does it put too much stress on your funds? And could a cash injection, from an investor or a loan, be what your business needs? Or is the growth from it not enough to justify the risk? Run through different scenarios, and go into the decision with a little more insight. When you get into business you do it because you’ve got plans for the future. But in the day-to-day slog, it’s easy to get caught up in the short term problems, and forget where you want to go. Forecasting brings your gaze back to the future. It reminds you why you are in business, and what the over-arching goal is. And in our eyes? That re-focusing is one of the most powerful benefits of forecasting. Last, but not least, who doesn’t want to sleep a bit easier, knowing they have a better hold on where their business is going? Not knowing what is coming is stressful. It wears you down, drains your enthusiasm, and haunts you with all that could go wrong. Forecasting means you can have a plan of attack, and a plan is the best way to combat stress. If you still aren’t sure whether forecasting is for you, talk to us about it. We’re more than happy to go through the pros and cons of it with you! Thanks, the MHCO team