Cash flow is the lifeblood of any small business. Even the most promising ventures can falter without a steady stream of cash to cover expenses and invest in growth.
If you’re grappling with cash flow issues, you’re not alone. Many small businesses face this challenge, especially in their early stages or during periods of economic uncertainty. However, with a proactive approach, you can often navigate these difficulties and build a more resilient financial foundation.
Understand the Root Cause
The first step in addressing cash flow problems is identifying their source. Common culprits include:
- Late payments from customers: Inconsistent receivables can severely disrupt your cash flow.
- Overestimated revenue: Basing your budget on overly optimistic projections can lead to shortfalls.
- Excessive expenses: Rising costs, whether fixed or variable, can outpace your income – particularly if not properly budgeted for.
- Poor inventory management: Holding too much stock ties up cash unnecessarily.
- Not knowing your numbers: Many small businesses don’t look at cash flow until it becomes an issue! Some haven’t modelled out why they charge what they charge, their specific margin requirements and overheads.
Whether it is one or more of these things, or something completely different, the first step is to understand the route cause. By analysing your financial data, you can pinpoint the specific issues affecting your cash flow and prioritise solutions accordingly.
Implement Quick Wins (carefully!)
When cash flow becomes tight, immediate action is often essential. Consider these quick remedies, but also make sure you understand the implications (ie: cutting marketing spend which is generating leads is often not a sensible idea on balance):
- Get to know your numbers!: What is the shortfall, and when and how long is it going to be an issue? What is your true gross and net profit – understanding these numbers will build the foundation of what is required, and what levers you have available.
- Tighten credit control: Shorten payment terms for customers and follow up promptly on overdue invoices. Offering early payment discounts can also encourage faster settlements if absolutely necessary.
- Reduce non-essential expenses: Scrutinise your outgoings and eliminate or postpone non-critical spending. Focus first on things which are nice-to-haves but do not have a material impact.
- Negotiate with suppliers: Ask for extended payment terms or explore bulk discounts.
- Streamline inventory: Adopt a leaner inventory strategy to free up cash tied in stock.
- Consider short-term financing: A business line of credit or invoice factoring can provide temporary relief, but use these options judiciously and have a proper plan in place (this is something any lender will need to see too).
Strengthen Your Financial Management Practices
For long-term stability, adopt sound financial management strategies:
- Create a cash flow forecast: Regularly project your cash inflows and outflows to anticipate and plan for shortfalls. This puts into perspective your actual performance and cash collection against what may be an ambitious budget.
- Build a cash reserve: Over time allocate a portion of your profits to an emergency fund to cushion against unforeseen challenges.
- Monitor key metrics: Regularly review financial reports, such as profit and loss statements and balance sheets, to stay informed about your business’s financial health. Even if your ‘board of directors’ is only you, have a board meeting with yourself every month. Print off your P&L and go through this with a trusted advisor and mentor, or your accountant.
Working with a small business consultant is often a great way to get this in place, and have an accountability process, as they tend to be commercial and pragmatic (and they have probably been in your shoes!).
Seek an External Perspective
Sometimes, resolving cash flow issues requires more than internal adjustments. An external lens can provide valuable insights that may not be immediately apparent to those immersed in the day-to-day operations of the business. Your accountant is probably a good place to start, but they tend to be very cautious and risk-averse, so a small business consultant may complement their advice, as they can:
- Help to create forecasts and models: Your accountant can help with this, but the commercial lens offered by a business expert is more likely to be aligned if you are working with someone who can test your business model, sales and marketing and the wider business operations.
- Identify inefficiencies: Spot areas where cash is leaking or being underutilised – it is often easy to miss these things when you are focused on the day-to-day.
- Develop tailored strategies based on experience: Most small business consultants have been there, they know what it is like and have probably made the same mistakes. They can uniquely support you with specific actions based on your particular circumstances.
- Provide accountability: Ensure you stay on track with your financial improvement plans and the various moving parts across the operational, people and sales/marketing functions.
At CJPI, we specialise in helping small businesses tackle challenges such as these. Our consultants offer a fresh perspective and actionable strategies to optimise your financial processes. Learn more about how we can support your business.
Embrace the Opportunity for Growth
While cash flow problems can be stressful, they’re also an opportunity to build a stronger, more financially savvy business. Often these challenges, if responded to properly, give an opportunity to understand the root causes and a deeper look into the business model. Through an approach which includes taking decisive action, and seeking expert guidance, you can transform a short-term crisis into an opportunity to develop.
