As we are all aware, cash flow is the lifeblood to any business and is essential to enable a business to succeed. When sales are going through the roof, does your business have sufficient cash flow to sustain and support the growth? Let us look at some potential issues that might lead to or cause cash flow problems.
#1 Your customers are paying late or not paying at all
You have just made a record sale, hooray! You then deliver your product and invoice your customer expecting to be paid according to the pre-agreed credit terms afforded e.g. 30, 60 or 90 days. You are banking on your customer paying you within the stipulated time frame as you have to pay your suppliers, staff wages and operational expenses. However, when your customer pays late, there is a significant negative consequence to your cash flow. Not getting paid the cash when you expect it, you now find yourself in an unenviable position, unable to pay your suppliers on time or unable to meet payroll for the month.
In a worst-case scenario, you may not be able to collect a single cent from your customer. This will leave your business with a large cash flow hole where cash outflow is now far greater than cash inflow.
According to the 2019 Atradius report, Singapore overdue invoices account for 31.1% of the total value of B2B invoices, with 2.4% uncollectable
There are a couple of things you can do here:
- Ensure you conduct credit risk assessments on your customers if you were going to offer a credit sale.
- Ensure you have a strong collection process to reduce potential delays in receiving payments.
Taking control of collection process will help you reduce your business cash flow problems.
#2 Insufficient Profit Margin
Another point to consider is whether your pricing model covers all your expenses and hence allowing your business to make profit. If it does not (i.e. your running cost is higher than your ability to earn, resulting in cash flow problems) then you should:
- Analyse the industry you are in to see whether your pricing model can be adjusted to cover your costs.
- Assess your COGS and expenses to understand what activities/items can be reduced or eliminated entirely.
- If fixed costs are high and there is not much room to reduce, then you may need to find ways to increase your sales/revenue. Perhaps consider adding a new product/service?
#3 Lack of finance
Every business faces the challenge of balancing both cash inflows and outflows, ensuring there is sufficient working capital to meet all company’s expenses when they fall due. Many times business owners are reluctant to take on new customers or bid for new projects due to the lack in confidence on whether or not there will be sufficient funds to meet the increase in demand.
Invoice finance, a trade line or an overdraft can help solve short-term cash flow challenges. This will allow you to confidently bid for new projects or take on larger customer orders knowing you can draw on the finance facility to have sufficient working capital to support your business growth.
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#4 Your financial data is not up to date
It is difficult to assess your cash flow position if there is insufficient data in your accounting records. Make sure your book keeping is up to date. This will allow you to view and analyse all cash inflows and outflows based on up to date information. This includes expenses, sales, accounts receivables and accounts payables.
#5 Your business is not performing
One of the most challenging aspects of running a business is how to increase your sales and revenues. A good cash flow strategy is to get proactive in increasing sales and orders. Here are some suggestions:
- Reassess your service and/or product offering, is there still a market for it? Can you improve your service or product to attract more customers?
- Reassess your target customer segment, who are your potential customers and where can you find them?
- Increase and focus on marketing channels according to your customer segments.
- Try out different sales and marketing channels to see if it can bring in more sales.