The dangers of poor cash flow management
We’ve already seen how cash flow problems are the biggest killer of small businesses. Two thirds of Australian SMEs that go bust are actually profitable – and according to some studies, as many as 82% of small business failures are down to poor cashflow as a result of debtors paying late.
What exactly are the dangers associated with poor cash flow and poor cashflow management? For starters, it’s not just about staying in business. Cash flow issues probably have an even bigger effect on growth – we just never get to hear about all the small businesses that are stuck in a rut because their cash flow constraints are strangling them.
Typical cash flow problems
Let’s imagine a business which sells to other businesses (B2B) with, for example, a turnover of $100,000 a month. At any given time, this business could have upwards of $200,000 worth of invoices outstanding. The money it actually receives each month will depend on how promptly its clients pay.
Assume this same business has monthly operating expenses of $85,000 a month. These need to be paid on time, every time. Therefore, this company will encounter a cashflow problem if a particularly late-paying set of customers mean its inflow falls below the $85,000 in a given month – it will require careful management to ensure it always has sufficient funds available. After all, a failure to pay wages on time, or “bouncing a cheque” to the landlord or a key supplier, will have immediate and serious consequences.
The cashflow dangers in this scenario go deeper. After all, this company will also have one-off, or less regular expenses – especially if it wants to grow. For example, it may want to invest in marketing, R&D, more sales staff, or capital equipment. If the owner or financial controller assumes that these costs can be met from the company’s cash flow and then it falls short, it will have to raise money quickly. Depending on the funding option it chooses, this could lead to a series of further expenses as the company is now obliged to make monthly repayments on a business loan or a business overdraft.
Cashflow affects decisions
What’s more, if the company is hoping to avoid going into debt and wants to finance investments from its own healthy sales – as seems reasonable – it may find its options curtailed when the money is slow to materialise. The business may pass up the opportunity to hire a great designer, or postpone an advertising campaign until after the high season.
While better than getting caught out with no money in the bank, these are poor decisions which will be costly in the long run. All of the problems described above can be avoided if this business manages its cashflow correctly.
Manage your cash flow
Just as you carefully assess your business’ profit and loss accounts to ensure you are progressing according to plan, you should take regular stock of the cash situation and always have a monthly plan which details the expected incoming cashflow versus outgoings.
Even businesses which take cashflow planning seriously can struggle to predict their inflows for a given month. You may assume that all your clients are good payers, but you never know what problems they may suddenly face.
One way of taking absolute control of your cashflow situation is to use invoice financing. Becoming a client of tim. costs you nothing (zero upfront fees) – nor will you pay fees when you don’t need funds, but if your clients are late in paying or you want to get cash into your account to meet extra expenses, you can get 80% of any invoice paid within 24 hours. tim’s cashflow funding solutions are available to help grow your business, by providing you with the extra cash needed to fund your operating expenses, without the need to provide any personal property as security.
Combined with your own careful management, a flexible invoice finance facility is therefore a great way to ensure you aren’t missing opportunities or making bad decisions due to cash flow issues.