In my business career, I’ve experienced cash-flow problems several times and have suffered vicariously with many of my accounting clients. Not having enough money to pay bills, hire people, or add equipment can be very distressing. However, the extra cash you need to properly run your business is available—if you know where to look. Don’t let a chronic cash shortage put your business on life support!
Inadequate cash flow is usually the result of weak business systems or processes that fail to produce a profit or that keep working capital tied up too long. However, it is more than just a symptom of under-performing systems. Like cancer, insufficient cash flow leads to a breakdown of one system after another until it eventually kills the business.
A Symptom and a Cause
Inadequate cash flow is both a symptom and a cause of system breakdowns.
Poor cashflow is a symptom of:
- Unprofitable operations.
- Inadequate margins; break-even is reached too late in the month.
- A pricing system that doesn’t recognize true costs, or competes on low price.
- Labor expense that is high due to worker inefficiencies.
- Excessive waste, defects, product returns, or rework.
- Slow collection of money owed; noncollectable bad debt.
- Poor inventory management (too much inventory/slow turns/obsolescence).
- Business growth and expansion that exceed financial resources.
Poor cash flow causes further system breakdowns because:
- Owners divert business development time to cash-management headaches.
- Important systems are scaled down or eliminated such as marketing, product development, or accounting.
- Money is borrowed at high-interest rates, further eroding profits.
- Heavy system busters are introduced such as start-stop work-flow, downtime, unpleasant work environment, and so forth.
- Worker motivation drops, along with personal and system performance.
- Employees quit, especially if payroll is delayed; less-experienced people replace them.
- Owners can no longer hire the best people and the right people.
- Credibility is lost with vendors, bringing tightened terms (C.O.D) and soured relationships.
- A growing buzz in the marketplace labels the company, “in trouble.”
Diagnose the Root Cause—And Fast!
It is not uncommon for business owners to mortgage the farm, borrow money from relatives, get a bank loan, or take some other drastic measures to keep the sick patient alive. (Our family once sold a rental house to meet one payroll). However, if owners and managers do not diagnose the root cause of cash-flow problems, it is likely the patient will continue to weaken and eventually die anyway. The longer you wait to begin the healing process, the more difficult the cure becomes.
When poor cash flow causes enough system failures that the business can no longer attract customers or keep them happy, the organization will go into cardiac arrest!
If your company is experiencing slow cash flow, under-performing business systems are the culprit. Could the ailing system be in marketing? collections? pricing? inventory management? operations?
The strong medicine of daily improvement to your vital business systems and processes will soon have you in the pink. Don’t delay another day!