Growth sucks cash – that’s the number one law of entrepreneurial gravity. As your business grows, there will be bigger and bigger demands on your available financial resources, while managing everything becomes ever more complex.
Solving your cash flow issues sounds simple, right? Cut costs and have more money in the bank. However, the reality can be more complex, as you do need to spend some money running your business, and some input costs are unavoidable. It’s all about money in AND out and finding the ideal balance that allows growth.
What is cash flow optimization?
Cash flow optimization refers to the process of maximizing the inflow and outflow of cash in a business, in order to ensure that there is enough money available for necessary overheads without leaving excess cash tied up in low-return assets or inefficient operations. Cash flow optimization involves monitoring and controlling the timing and size of cash inflows and outflows, as well as identifying and mitigating potential risks that could negatively impact your cash flow. By optimizing cash flow and investing sensibly when you can, you can improve financial stability, increase your ability to invest in growth opportunities and minimize the impact of unexpected financial shocks. With cash, as with most things in life – if you fail to plan you plan to fail.
What are the five main causes of cash flow problems in business?
There are a number of obvious sticking points that might lead to liquidity issues.
Poor cash management
When cash is not managed effectively, it can lead to unexpected expenses and payment delays, which have a negative impact on cash flow and increase hidden costs such as bank charges or punitive interest.
If customers delay payments or fail to pay at all, it can create a significant cash flow problem. You may not be able to pay bills or invest in new and possibly lucrative projects if payments are not coming in on time.
High overhead costs, such as rent, utilities, and employee salaries, can quickly drain a company’s cash reserves.
Many businesses experience fluctuations in demand during different seasons, which can impact cash flow. For example, a retailer may experience high sales during the holiday season but struggle to generate cash during the off season.
Large capital expenditures
Large capital expenditures: Investing in large items, such as equipment or real estate, can tie up a significant amount of cash, impacting short-term cash flow.
As we can see, these problems also have their solutions built in. Let’s dig in for more detail and consider the following fixes.
- Invoice quickly and follow up with reminders: The longer it takes for you to invoice your customers, the longer it takes for them to pay you. Send invoices out as soon as possible, and don’t let overdue invoices lie.
- Offer discounts for early payments: Offering incentives for early payments can encourage customers to pay their bills on time, which keeps cash in your bank account. You could also offer a small percentage discount for payments made within a certain timeframe or offer a credit towards future purchases.
- Negotiate better payment terms with suppliers: This can help improve your cash flow by extending the time you have to pay your bills. For example, you could negotiate to pay your suppliers on a 60-day or 90-day term instead of the standard 30-day term.
- Manage inventory: Holding excess inventory ties up cash that could be used elsewhere in your business. To improve cash flow, you should analyze your inventory levels regularly and only order what you need when you need it, if that is possible within your production setup.
- Consider financing options: If you need additional cash to grow your business or manage cash flow, financing options such as a business loan or line of credit can be a stopgap measure. However, it is important to carefully consider the terms and interest rates of any financing options and make sure you can comfortably make the repayments. Don’t add more demands on the cash pipeline for a short-term fix.
As an entrepreneur, your job is to focus on growing your company, and you might not be able to dedicate all the time that you’d like to administrative and financial tasks. If you or your staff need an extra hand to stretch capacity and manage liquidity, then call in the experts at Outsourced CFO. We will examine operations, identify any gaps, and show you where you can accelerate your cash flow and cash conversion cycles in order to maximize your profits.
Let us help you make smart cash allocations and manage your cash flow with ease, using the insight and experience of a CFO who has handled large sums before. Click here to read more about our Cloud Accounting packages, or reach out to our team for assistance.