No matter if a business is big or small, extremely prosperous or slow-growing, they all experience cash flow problems. For example, you can accept lots of orders for your services or products, and extending credit to your clients and buyers, but your suppliers will not give you credit. This is denoted as overtrading and leads to cash flow insolvency which can be solved by maximizing creditors’ interests.
Common Cash Flow Insolvency Causes
- When sales volume is lower than expenses. As your business grows, you will not be able to pay attention to every dime you spend or earn. Question each of your expenses – office costs, capital expenditures, fees, salaries, various obligations. Make cuts wherever it is possible.
- The pricing is off. When a business is just starting, business owners set their prices low so to increase their business scope. The prices are then increased during the next few years. Business owners rarely rethink their pricing models. Pay attention to your gross profit margin (break it down to product, client or service category). If you notice that there are negative margin clients, it means that you are losing money on every sale made to them. Raise the pricing to these clients and lead them to other firms.
- Poor debt collection. There are two main reasons why this happens. First, people feel uncomfortable to ask for money. Second, they put debt problems aside thinking that the clients will eventually pay them, so they focus on other business problems. But this can cost you a lot. If uncollected debts grow large, it will be difficult for you to collect them in their entirety, and would probably have to write them off as “the cost of doing business”. If you do not collect on your sales, it means that it would be better if you never made the sale in the first place.
Where to look if you have cash flow problems? Check your collection practices and balance sheet. Are you collecting everything you are owed on a timely basis? If you are making collection efforts, how much are you spending on them?
You can remind your debtors about their obligations by sending reminder letters, making telephone calls, or paying them a personal visit. If this does not seem to work, you can hire a debt recovery agency that is specialized in this kind of work. You will be charged a certain commission (which depends on the amount of money that is to be collected), but the most of the money owed to you will be collected.
- Low sales. The bottom line cause is that your sales are simply too low, and you do not make more money than you spend. Think about growing your business in a more efficient way. Increase the average unit of sale, encourage customers to upgrade to higher value services or products, and keep your customers loyal to you.
Predictable and Consistent Cash Flow
It is hard to invest if your cash flow is under a veil of uncertainty. Make sure to have a 120-day cash flow forecast (which should be refined with time). When you make an accurate cash flow model, it will be easier to spot the patterns, and thus make more precise financial projections. Look to sell more in the off season (if you deal with seasonality), secure longer term customer contracts, and put efforts in predicting external factors that could impact your expenses or sales.
The most crucial thing is to take a moment to find the root of possible or existing crisis. Every business deals with cash flow crisis now and then. Establishing a closer and trustful long-term business relationships with your clients, increasing sales and prices, and collecting debts in a timely manner will help you avoid cash flow problems and keep your business balanced.