Prospective clients often come to me feeling frustrated and baffled by their business cash flow problems. “We just need to close this one deal,” they often say, or “We’ve already done two rounds of layoffs, but our runway keeps getting shorter!”
Fixing cash flow problems is rarely as simple as selling and cutting more. Layoffs without proper diagnosis can remove the cancer but kill the patient. When looking to improve cash flow, financial advice from a Turnaround Consultant or Fractional CFO can be the difference between success and strife.
How do I Identify issues with my business’s cash flow?
Cash flow issues in business come in many different flavors, and identifying the root cause is crucial to defining your turnaround strategy. Every business situation is unique, but cash flow problems generally fit into a few common categories.
Low Gross Margins
Running a business with gross margins less than 20% is extremely challenging, and only very large corporations are generally successful with this strategy. Small businesses with low margins are usually very busy, frequently overwhelmed, and seldom profitable.
Low margins arise due to:
- Bad pricing strategy
- Poor cost controls
- Bad cost accounting
Your financials may show the following signs of low margins (masked by bad cost accounting):
- Low or negative gross profit
- Very high overhead to COGS ratio
- Consistent operating losses at any revenue level
- Growing inventory balances compared to sales
To fix cash flow problems from low margins, you must do one or multiple of the following to your low-margin products and services:
- Identify specific products to target
- Raise prices
- Implement strong cost controls
- Eliminate unprofitable products
Intense working capital structure
Working capital is the cash needed to maintain business operations. For most businesses, working capital requirements grow as business grows, creating an inverse relationship between profit and costs.
Your working capital structure is defined by:
- Supplier relationships and payment terms
- Customer relationships and payment terms
- Product and service lead-times
- Purchasing controls and execution
- Inventory management
Changing your working capital structure is slow and often involves operational discipline or vendor negotiations. A Turnaround Consultant will map your working capital cycle in days to find opportunities for freeing up cash.
Excessive debt service.
Heavy debt burdens bleed a company dry, leaving no cash for growth. Luckily, this can be solved by recapitalizing debt, equity, or both. In such a case, improving cash flow is as simple as redefining your capital plan and executing that strategy.
Insufficient debt.
Some businesses have healthy working capital structures but simply need more debt to facilitate growth. These small business owners may be averse to taking on debt—not wanting the burden or risk, and believing that the operations should provide their own cash. This belief is typically a sign of inadequate business forecasting, which undermines the owners’ confidence.
Monthly forecasting proactively identifies cash flow issues and informs a healthy debt strategy to facilitate growth.
High customer acquisition costs (CAC).
Underperforming sales and marketing tactics can lead to a cash trap: new sales cost more than the profit they bring in, or the time it takes to recover the profit from a new customer is too long. Financial professionals can analyze your LTV and CAC golden ratios and help improve growth economics.
Excess overhead.
Businesses that hire too quickly or experience a revenue decline have a misbalance between their overhead and sales. An Outsourced CFO analyzes this by comparing operating expenses to gross profit trends and forecasts.
Small businesses prefer to correct excess overhead through sales growth. However, these attempts are often too slow, at which point a Turnaround Consultant would recommend layoffs.
Fraud or embezzlement.
A business owner once hired us to fix his unprofitable business, thinking he had mispriced a few contracts. After a short investigation, we discovered his company was, in fact, profitable, except his bookkeeper had stolen $600k!
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 to fix cash flow
Your business most likely has a complex combination of the above cash flow issues. For example, you may have excessive overhead supporting low-margin products and a lot of debt from prior growth cycles. A small business turnaround strategy must contemplate the interactions between these factors and correct cash flow issues as quickly as possible.
Work with a Turnaround Consultant or Fractional CFO to reduce confusion and improve cash flow.
