Cash flow problems can have a big impact on any size business but will hit smaller owner managed businesses much harder due to them usually having less resources than larger firms and not being able to access funding due to lack of business or personal assets available to secure borrowings.
Poor cash flow not only limits the ability to trade normally but can also damage the business reputation by not paying suppliers or employees on time or by exceeding overdraft limits.
Poor cash flow may also be an indicator that the business isn’t making any money
Research by Hitachi Capital highlighted that in smaller businesses
– 31% suffered late payments by customers
– 1.9m employees were paid late
– 57% spent at least one day a week chasing customers who had paid late
– 40% had used more of their own money to keep the business afloat
Poor cash flow can be caused by a number of issues ranging from poor cash collection to a general lack of financial management in the business.
There are simple steps that can be taken to help with poor cash flow
– have a collection policy for customers and don’t be afraid to ask for what is your money
– try to use free credit from suppliers if possible to balance against late payments from customers, but don’t rely on extended terms from suppliers
– look at the business and see if there are areas where costs could be cut or income maximised. This could be stopping selling unprofitable lines or not holding large levels of stock.
– are there general improvements in how the business is being run where changes to generate more cash as well as profits ? Having a third party look at the business will often spot areas where improvements can be made
There are other areas that can help but need more consideration
– are there assets that can be financed to generate a one off hit of cash ?
– is invoice discounting or financing an option ? Discounting may generate less cash but will be confidential which may be important for relationships with customers. Financing my help with debt collection from customers.
– should the owner introduce more funding into the business ? This is sometimes the first reaction but it may be throwing good money away if the basic cash flow problem isn’t addressed
At Harrisons Business Rescue, we can assist in identifying the problems causing the poor cash flow and then help find a solution that works for the owner and the business.
