Understanding the seven key causes of poor cashflow, along with our Cashflow Management Coaching can help business owners treat the underlying causes of poor cashflow. Through a review of the key causes, together with Kendons, we can set goals for improvement, and implement simple strategies to maximise cashflow.
The Seven Key Causes of Poor Cashflow:
One: Accounts receivable process.
A poor accounts receivable process will result in debtor days (the time between billing and banking) being too high. This will stifle cashflow. There are many strategies to minimise debtor days including tightening Terms of Trade, offering prompt payment discounts and streamlining the billing process.
Two: Accounts payable process.
A review of all suppliers’ terms may identify ways to improve cashflow and potentially achieve better Terms of Trade. Implementing budgets, streamlining the payments process to maximise prompt payment discounts and avoid late payment penalties is just the start.
Three: Inventory process.
Carrying stock for too long means full shelves but an empty bank account. This is no different if you’re a service provider with work in progress that is yet to be billed. Reviewing stock ordering systems and stock control processes (to name a few) will identify strategies to ensure cash hits the bank sooner
Four: Inappropriate debt / capital structure.
Often significant cashflow and interest charge improvements can be achieved with a regular review of existing debt. Maybe debt / capital structure could be improved, or perhaps debt should be consolidated and paid off over a longer term. There may be a need to review and adjust what you are drawing from the business, or perhaps the business needs a capital injection to fund its growth.
Five: Overheads too high.
Every business should do a thorough review of its overheads each year. Reviewing the effectiveness of the marketing spend, going paperless, putting expense budgets in place and changing technology platforms are some simple ways to reduce overheads.
Six: Gross profit margins too low.
Gross profit margin is what is left from sales value after variable costs are deducted. There are a large number of strategies that can be implemented to increase margin, such as focusing on rework and wastage, reducing stock shrinkage and improving team productivity, just to name a few.
Seven: Sales levels too low.
If the current sales levels don’t support overheads and other cash demands on the business, then the business is not currently viable. If in high growth mode, a financing plan will be necessary. If not, we need to consider how to grow sales. To grow sales we need to focus on customer retention, generating leads, improving sales conversion, customer transaction frequency and pricing strategies.
Treating the underlying causes of poor cashflow can set businesses up to achieve future plans without stress and worry. Kendons offers Cashflow Management Coaching for clients so together we can set goals for improvement and implement simple strategies.
Contact Kendons to discuss how we can help with cashflow management here