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How To Deal With Cash Flow Problems

Written by John Kounas
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Cash flow is essentially the lifeblood of a business. If you have cash flow problems, then your business will have problems. You might face problems such as being unable to pay your bills, invest in your business, or have the ability to take on any unexpected challenges.

This blog will talk about what cash flow is, what problems you might have with your cash flow, and ways that you can better manage your cash flow to not just keep your head above water, but build a thriving business that makes a difference in the world.

As Australia's leading training and coaching provider for business owners, we have decades of experience coaching & training businesses across finance, educating our community of 550,000+ business owners on cash flow management strategies, and much more. Let us show you where to start.

To those just starting out, let us guide you on how to start a business in 2022 first.

What is cash flow?

One of the core teachings we drill into our community of business owners is this: cash flow is the life blood of your business. It is the fuel to the rocket ship that is your business. If you want to be able to grow your business successfully and sustainably, you need to understand the cash flow in your business.

What makes up your business' cash flow? Sales - the most essential part of your cash flow. Without customers paying you for your goods or service, you will not have cash flow. You may have capital, and you may have investors, but you don't have cash flow. 

Obviously, for most business owners, the aim of the game is to sell your product or service meaning you will have cash flow. However, when do you know when you have cash flow problems?

Main types of cash flow problems

Your cash flow can be impacted by various factors. While supply chain issues may be out of your hands, you would be surprised to know that cash flow problems are often caused by issues under the business owner's control.

Expecting large growth

If you overestimate your expected profits, you may increase your expenses in anticipation of an increase in cash flow. When those predicted sales increases don’t happen, you could be left short on your cash. It’s good to be optimistic, but you should also be realistic.

One way to set stretched but realistic goals is by capturing data from your growth channels (Marketing & Sales) and reviewing the Return-On-Investment (ROI) different channels return. By knowing what ROI you receive from each channel, you'll be able to better predict the returns when you spend more money on those channels, rather than guessing.

Overhead costs

If overheads start to creep up, things not thought of in your budget, these can begin to eat into your cash flow as well. It could be costing you more money to be in business. By ensuring that you have a clear overview of what each team is spending on and making sure that you know where your money is going, you'll be able to keep a better eye on if things start to stack up too much.

Incorrect budgeting

New businesses sometimes fall victim to incorrect budgeting. Without a good history to work with, you might not be able to accurately budget for everything. If you under-budget, you will suddenly need cash to pay for things you hadn’t anticipated. If you over-budget, you may be flush with cash and tempted to spend, which could create different problems. Here there's a good opportunity to work with experts, mentors or a business coach who might be able to help you better budget.

Not understanding accounts receivable

This issue is very common. You do the work, invoice the client, and you’re excited because you just made money! But actually, you haven’t made any money yet. It’s not until they pay you that you’ve made money and unfortunately, some people spend their invoices before they’ve been paid.

If you have 14 days payment terms, your cash flow will have a 14-day delay. If you have clients who pay late, this will be even longer. The snowball effect could be your inability to pay your own bills on time.

By setting up processes that account for any delays and refunds as well as follow-ups on delayed payments, you'll be able to better account for the cash flow changes as they come.

Why you need to manage your cash flow

To avoid these problems and ensure that your business has enough cash to survive and grow, you need build a strategy that monitors your costs and manages your cash flow situation. There are good reasons to have your cash flow under control.

Unexpected expenses

If something unexpected happens that needs cash to fix, and if you don’t know the state of your cash flow, it could delay your efforts to solve the problem. Rain damage to your shop? Urgent repairs to a company vehicle? A need to update your IT inventory for security reasons? Without knowing your cash flow, not being able to sort these problems out can hinder your business. Managing cash flow problems effectively requires careful planning and resource management. One useful tool for businesses facing cash flow issues is a borrowing power calculator. This tool helps you understand how much you can borrow based on your financial situation, enabling you to make informed decisions about securing additional funds. By accurately assessing your borrowing capacity, you can better plan for and address cash flow challenges

Applying for loans

If you approach a bank for a business loan, they will want to know your cash flow. It's a factor in being able to repay your loan. If you can’t show good cash flow management, this may make the bank feel you may not be able to repay a loan.

Control over your business

Knowing your cash flow cycle, and having clients pay you on time and in full, can give you control over your business. If you’re scrambling for money and don’t know how you’re going to pay your electricity bill because three clients are late paying you, you may feel out of control and more stressed. You want to feel confident that your business is doing well and viable. A positive cash flow will help with this.

Cash flow management strategies

You can implement effective strategies and install a strong cash flow management plan, and they’re not that complicated to do.

Be aware of your cash flow cycle

Knowing the cycle of cash flow in your business can help you budget for bills, find money to reinvest into your business, and indicate if and when you’re able to hire new staff.

The cash flow cycle is the cash that flows into your business- invoices paid by clients, and the cash that flows out of your business - invoices you owe, bills, rent, wages etc.

Knowing the time frame of accounts receivable, which clients pay on time, and which ones need a prod, all help paint a picture of cash flow management.

Review your expenses and overheads

The overheads you have at the beginning of your business journey may differ from where you are now.

  • Have you moved to larger office space and so rent has increased?
  • Are there new employees?
  • Has the price of software you're using gone up in the past 12 months?
  • Have the cost of making your product increased or decreased?
  • Are there alternative sources to make your products?

Reviewing these costs and overheads can give you an accurate picture of your current cash flow situation. It can prompt you to cut back on expenses or discover you’re better off than you thought and could improve your place of work.

Assign time to promote your business

Marketing and sales helps to bring more money into your business. Whether you're physically selling your product or service through networking with people who need what you provide, or you've set up marketing channels that lead people down the marketing funnel and towards a purchasing decision, you have to ensure you're putting time towards your growth channels.

Have effective ways to pay

If someone wants to pay you, make it as easy as possible to do so. Do you have a secure online payment portal? Is there a way someone can tap and go? For big invoices, do you have the option of a payment plan? How about discounts for paying the whole amount up front? Getting cash into the business is what it's all about. 

Key takeaways

Understanding how money flows into and out of your business is vital for your business’s survival. You will know when you can invest in your business or when you need to tighten the belt. Get your accounts in line or make time to speak to some experts about money management and cash flow, so that you can better power your business onwards and upwards. 

If you need more financial training and coaching, our programs at The Entourage work with 6, 7 and 8-figure businesses to help them put better structures and systems in place to accelerate growth rapidly and help the business start working beyond just you.

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