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.
Three Measures
''If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction, and cash flow.'' - Jack Welch