Understanding and correcting business cash flow problems

Dominique Grubisa
Dominique Grubisa

Published 11:11 pm 9 Mar 2020

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The saying “cash is king” may seem like a throwback in today’s e-commerce and contactless-dominated market, but reliable operating cash flow remains a crucial factor to a business or investment thriving or failing.

Whether you’re a small business looking to grow your customer base or a medium enterprise looking to scale and spread—or even an ambitious investor—reducing cash flow pressure is crucial.

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Common cash flow problems

Every business will experience common cash flow problems at one time or another. There are always routes to return to a positive cash flow. However, there are two main signs that your business or investment does not have a healthy operating cash flow.

Firstly, your bills are piling up and you often have to ask for more time to pay them, typically with some kind of financial penalty that increases your costs.

Secondly, your customers and clients aren’t paying on time and it’s leaving gaps in your cash conversion cycle that the business must fill. Some business owners even rely on their own cash reserves to fix this, which is risky and not recommended.

Hidden signs of cash flow problems

The more hidden and complex signs that your business has cash issues are often through lack of awareness by decision makers.

Sometimes businesses struggling with cash flow hit a popular niche and expand too quickly, overextending their line of credit and missing payment dates.

Other times an unforeseen industry trend creates overwhelming demand for a product or service, which soon disappears just as quickly as it arose. If something feels too good to be true, sadly it often is.

Buying A Business

Buying A Business

Other causes of cash issues

Many businesses do not plan for the rainy days. While the business may have a financial flow that is both regular and reliable, it’s never been enough to put significant funds away to weather adverse industry trends or uncontrollable external events like extreme weather, disease or global political upheaval.

A lack of effective customer relationship management can also cause cash issues. All too often, sales teams own relationships and take them when they move on to other opportunities. Similarly, many businesses don’t employ effective CRM systems, analysis or reporting that reveal why customers are leaving or why orders are shrinking.

Cash flow vs bottom line

It’s important to remember that business cash flow isn’t a reflection of your bottom line. The profit/loss column may be spectacular—enough to keep your investors, stakeholders and employees confident in the business and the industry—but a reliable and regular operating cash flow in and out will provide both short and long-term both resilience, as well as the muscle to take action when the expected occurs—like Australia’s recent summer of record extreme weather events, which affected the entire economy from the local corner shop on up.

Cash flow quick fixes

There are quick ways to reduce your cash flow pressure with minimal financial outlay. Typically they are obvious administrative routes that fall by the wayside because of time or resources, but by asking the right questions and seeing the bigger picture at play, tiny wins will add up to positive cash flow. Try these:

Negotiate longer payment terms with suppliers

Longstanding relationships with trusted suppliers can be leveraged to negotiate new terms for payment. If you’ve never been late then there’s no reason to doubt new payment terms. Your suppliers may also see a benefit if your business is expanding—extending invoice cycles from 30 to 90 days may end up creating more profit for both parties.

Negotiate higher prices for your offering

Prices are always going up for just about every product or service and while being the least expensive can act like a reliable marketing strategy, your business may be underestimating its value to clients and customers. This may have to be negotiated per account or introduced over a period of time, and often you will need to reiterate the value of your offering to get everyone on board. Some clients may be more than happy to pay a higher rate for the peace of mind that you will continue to be a reliable provider.

Negotiate shorter payment terms with clients

Similarly to increasing your prices, negotiating new payment terms may lead directly to better cash flow. Your clients may also be amenable knowing that you are working to become a bigger and more reliable vendor.

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Good Debt Vs Bad Debt With Dominique Grubisa - DG Institute

Lawyer, Asset Protection Specialist and Property Educator

Dominique Grubisa is a practicing lawyer with over 25 years experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author.

This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

About DG Institute

Founded in 2009, DG Institute strives to empower everyday Australians to grow and protect their wealth. Our goal is to provide direction, motivation and inspiration to our clients and help them perform at their very best. We do that through our professional services, in addition to teaching them how to grow their wealth through property and business education.

This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

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