Business cash flow is complex. If you have gotten your MBA, you know a business can be profitable but cash flow negative. A business can also be unprofitable and cash flow positive. Cash flow issues in small business are common and not as simple as boosting revenue or cutting costs. Let’s examine how a business identifies and improves cash flow problems.
Identifying cash flow problems
Cash flow issues in business come in many different flavors. Knowing how to solve cash flow problems depends on identifying the root cause. Small business owners often resort to the same tools for every problem: get more sales… get more debt… work harder! If you have not identified the exact cash problem in your business, your efforts may be making the problem worse.
A turnaround consultant will quickly and accurately identify your business cash flow issue. Below are some common small business cash flow issues they may identify:
- Inaccurate cost accounting & poor margins. Small businesses unknowingly grow low-profit or unprofitable products and services because their accounting is inaccurate. A turnaround consultant will assess your accounting, analyze your margins, and make appropriate strategic recommendations.
- Intense working capital structure. This could be driven by poor supplier or customer relationships, long manufacturing lead-times, bad purchasing controls, or lack of inventory controls. Turnaround consultants will implement controls and negotiate with customers & suppliers on your behalf to free up more cash.
- Excessive debt service. Companies with heavy debt burdens or predatory loans are bled dry making payments, leaving no cash available for growth. A turnaround consultant is experienced at renegotiating debt with lenders, stretching payment terms, and forgiving large portions of debt altogether.
- Insufficient debt. Some businesses require more debt capital to facilitate their growth. These small business owners may be averse to taking on debt – not wanting the burden, not wanting to take the risk, and believing that the operations should provide its own cash. This belief is typically a sign of inadequate forecasting, budgeting, or understanding of business financials, undermining the owners’ confidence. Engaging professionals to build a solid financial plan will give you (and the bank) the confidence to secure a low-cost loan to grow your business.
- High cost of growth. Underperforming sales and marketing tactics can lead to a cash trap where new sales cost more than the profit they bring in; or, the time to recover the profit from a new customer is too long. Financial professionals can analyze your cost of growth (sometimes referred to as CAC and LTV), focus or refine your go-to market strategy, and make your growth sustainable.
- Excess overhead or inadequate sales. Businesses experiencing a decline in revenue or rapid growth may have a misbalance between their overhead and sales. This can be corrected in a number of ways – pricing strategy, rebranding, reduction in force, investment in advertising, etc. Determining the best correction will be a collaborative effort between you and a turnaround consultant.
- Fraud or embezzlement. Any of the above issues may be a misdiagnosed case of fraud or embezzlement occurring in your business. Fraud is most often committed by your accountant or bookkeeper but could be done by any trusted employee or partner. Using an unbiased third-party to investigate fraud is critical to effective detection and remediation, so contact us immediately if you suspect fraud in your business.
How a business can improve cash flow
Small businesses commonly have a combination of cash flow issues. For example, a high cost of growth may have forced you to take on excessive debt; or, inaccurate accounting may be allowing fraud to occur. Since time and cash are running short, prioritizing these issues and executing the right solution is critical to an effective turnaround.
You would not expect a doctor to prescribe a medicine without performing a thorough examination and testing. Similarly, you should not expect to solve your cash flow problems without identifying the proper business cash flow issue.
Engaging a turnaround professional will empower you by identifying the issues quickly and building a financial plan to improve cash flow. Our CFOs are available for a free consultation to see if we can help your small business with a turnaround. Book an appointment here.