How to Pinpoint the Real Cause of Your Cash Flow Challenge

Over the past twenty years I’ve coached thousands of companies in dozens of industries. One of the most common reasons someone reaches out to my company, Maui Mastermind, to help them scale their business is a painful cash flow challenge.

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Here is the diagnostic process we’ve refined over the years to help pinpoint the precise cause of that cash flow issue so that your company can rapidly turn things around.

Culprit #1: Poor Collections Practices.
The most common culprit of cash flow issues are poor accounts receivable practices for colleting on the money they are owed.
• How much of your A/R goes uncollected?
• How slow are you to collection you’re receivables?
• What is your average “collections cycle”?
• What does an aged A/R report show?
Before you scramble to just sell more, make sure you don’t have a fatal hole in your revenue bucket draining thousands of dollars.

Culprit #2 Pricing that Is Too Low.
Look at your gross profit margin. This is perhaps the most misunderstood and least leveraged number in your business. Your gross profit margin is a measure of how much money you have left over from every sale after you take out what it cost you to produce or acquire the product or service you just sold.

Why this number matters so much in the context of diagnosing cash flow issues is it lets you see how your pricing is relative to your direct costs of production and fulfillment.

One common cash flow issue you can often spot in your gross profit margin is poor pricing. If this is a challenge for you, it will often become obvious when you look at your gross profit margin, whether on a global perspective, or product by product, or customer by customer.
• Are you charging what you should in your market?
• What do you price relative – to costs and competitors? Or to value and your customers cost of status quo, factoring in the difficulty of replacing you?
• Does your salesforce use discounting in ways that hurt you? How about your marketing team?
• Does “scope creep” kill your margins?

Over the years I’ve suggested to many of our business coaching clients that they could and should raise pricing. For example, one law firm we worked with increased their operating profit by over $300,000 per year by raising the pricing they charged on their paralegal staff’s time. Is it time for you to raise your pricing? You can always test this by doing a small test of price increases to your least enjoyable customers first to gauge the response.

Culprit #3: Low Sales.
Many times the real cause of your cash flow issue is that your sales are too low relative to your fixed overhead. (NOTE: Culprits 1 and 2 had nothing to do with sales level, but rather were cash flow issues that more sales could potentially exacerbate, not cure.)

But if your collections are reasonably strong, and your gross profit margin is healthy, look at your current sales volume as the next most common cash flow issue.
• Is your cash flow challenge primarily caused by poor sales?
• Do you need to increase your lead flow?
• Do you have enough leads but poor conversion systems?
• Or do you lack sales capacity? Or need to train your sales team better?

Culprit #4: High Production and Fulfillment Costs.
Is your COGS too high relative to what you are selling? This would mean that part of the solution lies in controlling the cost of your raw materials, or labor production costs, or reducing scrap and rework. For example, one manufacture we worked was able to save $250,000 a year in unnecessary overtime.
• When was the last time you analyzed your raw material costs?
• Have you truly optimized your labor cost?
• Can you get more from your overhead burden?

Culprit #5: High Expenses.
Are your below the line expenses too high for your current sales volume? Sometimes the only way to solve an acute cash flow challenge is to rigorously go over your expenses—line item by line item – and make the painful cuts.
• When was the last time you audited your expenses?
• Have you gotten your team involved in controlling expenses?
• Have you applied the “strategic” vs “non-strategic” expense distinction to help you control your company’s expenses?

If you enjoyed the ideas I shared, then I encourage you to download a free copy of my newest book, Build a Business, Not a Job. Click here for full details and to get your complimentary copy.