Cash Flow Issues

A 4-Step Tool to Diagnose and Fix Your Cash Flow Issues

Just when you finally feel on solid footing balancing your rapidly growing sales with systemic increases in your ability to produce and fulfill, you’ll face the next small business barrier to scaling—the Financial Barrier.

Typically this will manifest in one of two ways (or for some companies—both!)

The first way it might manifest is as a cash flow crisis. Often it is caused by a business that gets sloppy as it is enjoying fast growth over a number of years, and it simply loses its financial discipline.

Collections stretch from thirty days to sixty or ninety days. Margins slip as companies just make poor financial decisions like over-investing in fixed equipment or facilities, or just over-hiring. And because they are not paying close enough attention to the numbers of their business, they find out after a significant amount of financial damage has already occurred.

The second way this barrier might manifest is in a financial record keeping mess. The company is growing so fast that it rapidly outpaces its accounting expertise and capacity and the financial book keeping and financial pillar of the company aren’t just sloppy, but they are just plain inaccurate. So the leadership team is operating on flawed information, making guesses.

This hurts the decisions being made, which in turn causes the company to radically under-perform what it could and should be producing.

Plus, now the owner doesn’t trust the financial information. This uncertainty about the exact financial picture turns into anxiety and fear on the part of the owner who becomes constricted and pulls back on the reins of the business.

This means the business is contracting at a time when if they business had good, solid, trusted financial data the owner would likely be pushing forward with smart, proven strategies to grow and scale.

Other ways the Financial Barrier can come up include a lack of a plan for funding for growth. Growth always costs money, and smart companies plan for funding that growth before they need it.

This barrier can also manifest in the form of poor financial controls which sadly can culminate in theft, embezzlement, or just plain dumb financial decisions. However this barrier arises, what is clear that you need your financial house in order to successful sustain growth over the long term.

Here is a quick 4-step diagnostic tool to help you understand and fix your cash flow issues (plus several suggested resources for you to check out to upgrade the Financial Pillar of your company.)

  1. Your collections cycle. It’s our observation that most business owners are simply uncomfortable or even afraid to look clearly at their collection practices. They bury their heads in the sand and passively wait to get paid.

    Many are even afraid of upsetting clients by asking for payment and push it off onto their bookkeeper or another poorly equipped member of their team.

    One of the most important lessons with respect to managing cash flow is this: The faster you collect from your customers, the easier it will be to manage your cash flow.

    Most businesses carelessly fall into cash crunches because they let their receivables slip longer and longer before being paid. Not only does this put the revenue in jeopardy because the longer it takes you to collect, the lower your odds of getting paid, but the higher your collections costs rise, cutting into your margins.

    That is why you need to do all you can to accelerate the pace of your “collections cycle,” the average time from the moment you have cash going out the door for “cost of goods sold” to the time you collect on the sale of that product or service.

  2. 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.

    Your Gross Profit is calculated by taking your Total Sales and subtracting the direct costs involved with producing or acquiring your product or service (your “Cost of Goods Sold” or “COGS”). When you express this number as a percentage of total sales you get your “Gross Profit Margin”.

    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/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.

    Or maybe you uncover that you need better cost controls to reduce your “COGS” (either to reduce materials cost, overtime hours, wastage, expedites, scope creep on fixed fee pricing, etc.)

  3. Your “expenses” relative to sales. If your cash flow issues are not caused by shaky collections or poor pricing or production cost controls (points 1 and 2 above) then the third place to look are your other “expenses”.

    Is your cost structure to run your business, separate from your costs to produce and fulfill on your product or service, too high relative to 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.

  4. Your strategic cash decisions. The final part of managing your cash flow is making smart big picture financial decisions. This includes things like your pricing model, capital investments, staffing, and other strategic investment decisions.

    Are you over investing in too many initiatives that won’t pay off until down the road? What about your staffing levels, do they make sense relative to your current real work load? How about your set inventory levels?

    The big picture strategic decisions you make that cost cash have a real impact on your cash flow.

Further Resources to Help You Effectively Deal with Cash Flow Challenges:

  • Chapter 10 of book, “Scale: 7 Proven Principles to Grow Your Business and Get Your Life Back” (Penguin Random House) Pages 171-196 cover the 7 “Cash Flow Commandments”, 15 ways to fund growth, and 21 financial controls to safe guard your company from fraud and theft. Plus, as part of the book you get access to four Financial Pillar training videos (15-50 minutes each) to intelligently structure and scale your company’s Financial Pillar.

  • Video 1 of the Free 5-Part Video Training Course titled, “How to Escape the Self-Employment Trap and Build a Business, Not a Job”. (90 minutes)

  • Free business coaching session to try out the Business Coaching Program (60-90 minute session if your business qualifies).