Are you not billing or collecting payments from customers on time, not asking for longer terms than 30 days from vendors and letting products sit in inventory for too long? You're not alone—these are common cash-flow problems in a business. And if you want improve your cash flow, these issues need to be addressed.
But in addition to these common issues, there are cash-flow problems in a business that can lurk much deeper inside a company. And that may make them more difficult to find or fix. Things like:
1. Overestimating future sales.
Most companies can calculate their monthly expenses fairly well. But knowing exactly what their revenue will be next month can be more difficult.
Look at your gross margins. Remember, it is much harder to make a profit with a 20 percent gross margin versus a 70 percent one.
Consider looking at the historical accuracy of your forecast on a month-to-month basis. Try being more conservative by rounding down instead of rounding up.
You can also determine the major factors that influence the forecast both ways. Is it always one product or one channel of distribution?
2. Impulse spending.
Too many businesses invest spontaneously on the next solution that they think will make them millions of dollars. They reason that they must spend more money to increase their revenue. But this can create cash-flow problems in a business.
You can address this by having a cash flow-based budget (not one that is accrual based) and stick to it. Make changes strategically and only after careful analysis, instead of treating them as a big reaction to something that just happened.
3. Little assessment of a customer's credit worthiness.
Credit is a privilege for customers, not a right. Collecting payments on time from customers starts with deciding who deserves credit.
This can help identify the customers who are most likely to pay on time based on their histories.
4. Only using a monthly billing cycle.
Traditionally, many companies bill their customers monthly and then get paid 30 days later. But this can limit incoming cash receipts.
Try implementing billing on a bi-weekly or weekly basis—that can help bring cash flow into the business more quickly.
5. Buying instead of researching a lease.
Companies that only buy equipment, tools and application software often require a lot of cash.
Instead of paying for an asset upfront, find ways to lease these resources monthly—especially since some of these tools don't generate cash at the start. If possible, try to only buy or lease what the company can make good use of now and not what it needs sometime in the future.
6. High inventory reorder points and quantities.
Some companies pay little attention to when they reorder products and at what quantity. This can result in stockpiling slow-turning merchandise, which means using more cash.
You may want to consider setting your inventory reorder points and inventory reorder quantities as low as possible. This can help you meet a fill rate (how often the product is in stock) your customers accept and at the level to get the vendor discounts that are needed.
7. Low inventory turns.
The more inventory that sits on the shelves, the more cash it locks up in a business. If a stock vendor needs to be paid before that product is paid for by the customer, this hurts the company cash flow.
Analyze how each product sells (called turns) per year. Then, try to stock more inventory that moves quickly and less of slow-moving ones.
8. Not enough cash on hand or access to short-term loans.
Most companies hit a stretch where they need to draw from cash savings or want a short-term infusion of cash. It is important to have these resources even if it is rarely used.
With that in mind, I recommend keeping a cash cushion of 50 percent of sales for three months. You may also want to secure and keep a line of credit available from your credit card providers or other financial institutions.
9. High interest on too much debt.
Some companies' monthly payments on their high-interest, short-term debt can cause serious cash-flow problems in a business. While their company may be making a monthly cash profit, all of that is going to pay down short-term debt.
Consider looking into converting your current short-term debt to long-term debt by using the Small Business Administration or other traditional vendors.
10. Not focusing on profitability.
Finally, it is very difficult for companies to resolve cash-flow problems in a business over an extended period if they are not profitable. Businesses that always lose money eventually run out of cash unless there are consistent outside infusions of capital.
To address this, do a detailed analysis of how the company generates revenue and what it costs to produce those sales. Look at your gross margins. Remember, it is much harder to make a profit with a 20 percent gross margin versus a 70 percent one.
These are some of the first steps in helping to increase profit and cash flow. So if you have addressed all the common cash flow issues in your company and are still having problems, choose one of these to work on next!
Read more articles on cash flow.