Spotting the signs of a cash flow crisis

In any business, cash flow is integral to survival… it can literally be the difference between success and failure. Many business owners walk a fine balance when it comes to managing accounts receivable and accounts payable.

This balance between debtors and creditors can be time consuming to manage and emotionally draining to stay on top of… without chasing your outstanding debtors, how will you pay your suppliers and creditors on time? And what about your employee wages? And not to mention re-investing back into your business, increasing stock levels, on-boarding new products and services… it’s easy to see how the pressure of maintaining positive cash flow can quickly turn into a headache!

Here at Lawrence, we see a number of business owners who find themselves in the midst of an unfortunate cash flow crisis – and had only they spotted the warning signs sooner (or had an accounting team to help them spot these hazards), they could have enacted a plan to keep things on track and minimise damage along with limiting the impact of short cash flow funding.

Business owners, we urge you to take this opportunity to think about your cash flow situation and ask yourself the following questions… it might just save you a crisis down the track.

Warning Sign #1: Do your debtors pay you slowly, late or avoid payment altogether?

If so, you might be heading towards a cash flow crisis.

No business ever wants to lose its customers or clients… after all, it took work/marketing to win them so you want to keep them around. But if your customers/clients are slow to pay, they can drain the life blood (a.k.a. cash flow) out of your business.

Of course, asking a customer/client to pay your invoice is never a pleasant conversation, but the fact is that it’s part of business. While many business owners are hesitant to chase their account out of fear of jeopardising the relationship, but a slow paying customer/client (or worse, a non-paying one!) can grind your business to a halt, especially if finances are already tight.

Remember that in any business, you enter a contract with your clients/customers – you agree to provide a product or service, and they agree to pay on time. If clients/customers don’t uphold their part of the contract, it’s good business sense to chase that up.

Better yet, try to avoid the situation of slow and non-paying by having clear terms listed on your invoice, and regularly monitor your accounts receivable… in-build payment reminders into your process and your business will be less likely to encourage troublemakers.

Warning Sign #2: Do you price incorrectly or give excessive discounts?

Offering discounts or offering competitive pricing is an effective strategy to retain or win market share over your competitors, as well as to encourage new business.

But, do this too frequently (or inaccurately) and you could be at risk of a cash flow crisis.

If your business is not reviewing its pricing at regular intervals, you’re making a huge mistake. Why?
Because your competitors and suppliers have likely increased their own prices, so your inputs will rise and subsequently, impact your profit margins. Too many business owners lower their prices, find success with their discount then keep those prices exactly where they are for long periods of time… ignoring inflation, competitor price rises (that would allow them to proportionately raise their ‘discounted’ price) or market demand fluctuations that would allow the discount to be lifted and demand remain.

Warning Sign #3: Are you in a lot of debt?

This may seem obvious… but if your business is in a lot of debt, it’s only a matter of time before you experience a cash flow crisis. A struggle to pay your loans or credit cards should send alarm bells ringing in your mind so if that’s the case for you, now is the time to start looking at your loans and consolidating and/or refinancing.

Successful business owners prepare a budget of cash flow to enable you to identify any future cash flow shortages. If you can anticipate the need to extend your loans in advance (rather than arbitrarily chasing overdraft extensions in a reactive manner) then you will be better able to manage the business’ day to day financial position.

As you’re no doubt aware, loan application can be an extensive process so with a game plan, you can spot those hazards and anticipate for any delays well in advance… that way, your business is never left in the lurch.

Warning Sign #4: Are your sales/sign-ups low?

Without customers/clients and sales – your business has no future. A harsh truth, but there’s only so long that any business can survive without consistent incoming sales.

Many businesses think that incoming sales relate only to new customers, and miss opportunities to upsell or grab the ‘low hanging fruit’ from their existing customers. By developing a targeted list of customers/clients, tapping into their needs and creating offers that they can’t refuse. In fact, stats show that in general 80% of sales are made after the fourth to fifth contact with a customer… so your customer acquisition process can never be a ‘quick fire’ approach.

You must be in it for the long haul – and this also means that you’ll need significant cash flow to facilitate effective marketing.

If your sales are low and your marketing ineffective, you’ll soon start to see the gaps in the form of a cash flow crisis.

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Is your business experiencing the start of a cash flow crisis?

Or, perhaps you are already in the midst of a crisis? Or, perhaps you’d like to prevent one from occurring?

In any case, if your business is serious about managing its cash flow, talk to us today. The diverse team of experts at Lawrence can help keep your business finances on track and set you up for a prosperous future.

Contact us today for an obligation-free chat about your business cash flow.

This article is general information only. It does not give business, accounting, taxation, financial planning or other professional advice or service. It does not consider your specific situation, objectives or needs and if personal advice is required, a detailed analysis of your particular circumstances would need to be sought. Please see our Privacy and Disclaimers page for further information.