How to improve your cash flow
Thousands of businesses in Ireland fail every year due to a lack of cash flow. Many blame the lack of funding from banks. However, with better cash flow management they could have avoided many of the pitfalls that resulted in the business failing.
So, let’s look at the pitfalls and what the business can do to avoid these.
Problem: Poor sales and gross margins too low (not enough profit).
Solution: Review your marketing and implement a marketing plan that you know will deliver. If you haven’t done this before, enlist help and use “trial and error” to develop sales processes that deliver for your business. Look at introducing a price increase if necessary, as there is no point in being in business and losing money.
Problem: Poor cash flow management
Solution: Prepare a weekly/monthly cash flow plan and “review and update” on a set regular basis. This can be done using a simple spreadsheet with, “Cash inflows and cash outflows” and is a great business habit. While sometimes, you might feel like putting your head into the sand, this practice will help you sleep soundly at night.
Problem: Poor credit control process
Solution: Review your aged customer listing each month and identify slow payers and have a process for reminding and chasing these. Unfortunately, in Ireland we have a reputation of not paying until we are asked to pay. So, you will need to be proactive on this to ensure regular cash is coming in and a process to deal with slow payers. You could introduce a small discount for early payment to encourage customers to pay earlier.
Problem: Too much Debt
Solution: If the cost of servicing your current debt is too high. Plus, you are struggling to make the repayments, you could look at refinancing options. This could be in the form of debt consolidation which means combining a number of loans together into one single loan over a longer term. If this is not an option, you could discuss with an insolvency practitioner to see what options are available.
Problem: Too much Stock / Inventory
Solution: If holding stock forms are large part of your business then good stock management is key. Having a robust stock system in place that allows you to accurately manage your stock is critical. This will give visibility on slow moving items that you can discount to convert them into cash. You can then purchase faster moving items. Also, you can serve your customers better by quickly identifying what stock is available. You can also offer alternatives if that particular item is not in stock.
What type of businesses suffer most from cash flow problems?
While any business can have a cash flow problem, certain types of businesses are more prone to cash flow problems. These include businesses in Construction, Manufacturing, Wholesalers and Service companies who provide the service before getting paid.
Where to start?
Identify which problem above is causing you the biggest cash flow headache and deal with it first. I would always recommend having a monthly cash flow plan at a minimum. Remember, if you are running your business by constantly checking your bank account you should be looking at getting regular, accurate management accounts. Ideally produced and interpreted by an experienced accountant. These can be a fantastic tool. When you compare your business to the best of your competitors, you can be sure they are using them to manage their business.
At Solve Outsource, we are encouraging businesses to look at their accounts function and see would the accounting outsource model serve them better. We are always happy to talk to business owners and look for opportunities for them to improve their bottom line.
Do you want to get to a self managed company …
Looking to free up your time to do something more beneficial for your business?
Interested in finding out more about outsourcing your accounts? Check out our earlier blog that talks all about the risks and benefits of outsourcing your accounts.