Cash flow problems can sink a small business. Here, ActionCOACH covers everything you need to know about managing the money in your business. Cash flow is a major concern for small businesses. You’re often operating on tight margins and feel the need to make every dollar count.
If something goes wrong with how you handle your money, you could run into serious problems. An unpaid invoice, for example, could lead to your business not having the cash needed to pay its bills. If problems like these keep occurring, even a successful business could end up failing.
Cash flow problems kill companies. Just look at the stats:
- A U.S. Bank survey found that cash flow was the primary cause of 82% of business failures.
- In New Zealand, cash flow problems caused the failure of 25% of the companies that opened between 2013 and 2017.
- Cash flow is a factor in 40% of Australian business failures. In fact, Australia currently has a $76 billion cash flow issue.
It’s a common issue that ActionCOACH business coaches fix when their clients first start coaching. Here, we’re going to cover a range of issues surrounding the money in your business.
The Three Most Common Cash Flow Problems that Businesses Face
Before you can confront money management issues, you need to understand them. These are the three most common cash flow concerns.
Problem #1 – Fear of Business Risk
Many businesses run into problems because they don’t understand business risk. Many take the “smart” approach of avoiding borrowing money from a bank. ActionCOACH client Conron Stockcrete is a great example:
Conron Stockcrete creates innovative concrete water troughs. Before coming to ActionCOACH Mark Blume, they’d always avoided talking to banks. The owners, Joel and Rachel, believed that a bank would say “no” to any requests they put in for funds.
Mark helped them to change their mindset. Today, the company has the confidence to lean on the banks to access funds when needed. This helped them to clear up their debtor balance and paved the way for the company to increase sales from $10,000 per year to $93,000.
All businesses take on risk. Accepting this and knowing when and how to take on that risk is the key. This requires a change of mindset and confidence in money and the business.
Problem #2 – Cash Flow Gaps
Poor invoicing practices can cause cash flow gaps. You don’t get the money you’re owed when you’re owed it. That creates gaps that you have to try to account for. This happened to ActionCOACH client Hunter Fencing and Landscaping.
Hunter Fencing and Landscaping does exactly what it says on the tin. The company handles fencing and landscaping issues for clients.
They came to their ActionCOACH Marcus Kroek with serious cash flow problems. Founders Kath and Nigel really struggled to get their invoices paid on time. This created cash flow gaps because they weren’t getting the money owed.
Marcus helped them implement several processes to fill these gaps. These included defined terms and conditions on invoices and a new invoicing process. The company also created break even and cash flow spreadsheets. They now know how much money is due to come in and what expenses they need to pay.
Within four years, the company’s profits increased by 800% and revenue tripled. Creating defined processes is often the key to filling in the cash flow gaps.
Problem #3 – Poor Organisation
A lot of start-up businesses focus so intently on their services that they neglect the financial side of things. Just take a look at this case study:
Founded by husband and wife team Jock and Hanna Gammon, Junglefy is an innovator in the green wall space. The company had built a stellar reputation for product quality between 2009 and 2016. But its internal processes weren’t as developed. In particular, the business focused so much on its products that it neglected its financial organisation.
They came to ActionCOACH Andrew Laurie for a solution. We focused on creating financial controls and systems for the business to follow. These focused on issues like cash flow forecasting, financial reporting, and budgeting.
With Andrew’s help, Jock and Hanna developed a greater understanding of their financial situation. They professionalised the business and boosted revenues from $3.5 million to $8.5 million.
Getting organised is key because it helps you to understand where your business stands and where it needs to go. With better reporting, Junglefy could forecast their cash flow and avoid problems.
Forecasting is a particularly important solution to cash flow problems. It allows you to estimate which months will see a cash surplus and which will see a deficit. This can help you with understanding how you may require your surplus to cover a deficit in specific months.
A forecast can also highlight other problems. For example, if your real figures don’t match the forecast, there’s a deeper issue that you need to confront. Often, this is a systemic problem.
The Difference Between Financials (Budget/Revenue) and Cash Flow
Every business has financial concerns to deal with. Some of these are day-to-day concerns, whereas others focus on the bigger picture. Balancing those concerns is a key problem for many businesses. You may focus so much on the day-to-day stuff that you’re not paying attention to the bigger picture.
Of course, you can also end up ignoring the small stuff if you only focus on the larger concerns. Let’s break each one down so you can figure out how to manage cash flow.
Day-to-Day Financials
Your day-to-day financials include the following:
Financial Projections:
ActionCOACH client A Dozen Roses can highlight the importance of financial projections. A Dozen Roses founders Wade and Nicky found themselves struggling with their day-to-day financials.
In their case, a lack of systems for understanding financials was the culprit. They had no idea what their breakeven figures were or what sales targets they needed to achieve.
With help from ActionCOACH Marcus Kroek they put all of these figures and projections in place. They now have daily, weekly, and monthly sales projections that they aim to hit. In less than 3 months with Marcus, they now have a better understanding of what their business needs to bring in.
Projections like these help you to anticipate business problems and get ahead of them. They also highlight sales issues that you need to resolve.
Accounting:
A good bookkeeper can help you to keep track of your expenses and income. Regular reports and reviews will help you to keep track of the money in your business. Keeping track of everything allows you to fine-tune your strategy so that your money goes where it needs to.
Invoicing:
Your business likely handles invoices on an almost daily basis. You have to get this right to ensure you manage cash flow effectively. Make sure you do the following:
- Send out invoices immediately after providing a service.
- Set specific payment terms to ensure clients know when they need to pay. You may also implement penalties for late payment.
- Create invoice reference numbers that you can cross-reference with the payments you receive.
- Follow-up invoices via email or SMS. There are plenty of software packages and templates that can help with this.
Big Picture Financials
Your big picture financials include the following:
Business Loans:
The “when” is so important when it comes to business loans. Ideally, you’ll take out a loan before your business hits a crisis point. This allows you to manage the risk and also increases your likelihood of getting the loan. This makes business loans a big picture issue. You may not need one right now. But if you have plans for growth, a loan can provide your business with the money you need to avoid cash flow problems later on.
Your Exit Strategy:
Your exit strategy is a financial issue because you need a profitable business to exit well. ActionCOACH client Ivy Stevenson highlights why:
Ivy operates a travel agency that struggled to reach profitability. That meant she couldn’t put an exit plan in place. No-one wants to buy an unprofitable business.
With ActionCOACH Marcus Kroek’s help, the travel agency became profitable for the first time in four years. Ivy redefined her big picture goals and actions. Now, she’s in a position to exit the business healthily.
Tips for Speeding Up Your Cash Flow
The key to solving cash flow problems is to speed things up. Here are three actions you can take to manage cash flow and improve the flow of money in your business.
Tip #1 – Build Your Belief System
You can’t achieve anything if you’re operating under the wrong belief system. Let’s come back to Joel from Conron Stockcrete:
The biggest challenge Joel faced was a lack of belief in his own business. He didn’t believe that his marketing strategies would achieve enough sales to grow the business. That meant he was averse to taking on any risk in order to deal with his cash flow problems.
Working with ActionCOACH Mark Blume helped Joel develop confidence in his growing business. He trusted his strategy to generate the cash flow he needed. He also shifted his mindset in regards to business loans.
This allowed the business to build a shed and renovate its farmhouse. This brought the family together and gave them a stronger base from which to grow the business. Believe in your processes to remove one of the main barriers that can cause cash flow problems.
Tip #2 – Create Clear Cash Flow Reporting
Fast growth can also cause problems with the money in your business. Expenses increase along with your revenues, which means you need clear reporting. Gold Key is a house construction business based in Victoria.
With ActionCOACH Adam Barnard’s help, Gold Key went from a start-up to building 104 houses in 14 months. While this is remarkable growth, it also meant the company had to stay vigilant in regards to its cash flow.
Adam helped Gold Key to create clear cash flow reports that showed where the money flowed in the business. Gold Key also implemented a system to take care of their insurance concerns. The business’ growth meant their insurance kept running out.
With good cash flow reporting, they kept track of the increased expense for renewing their insurance. This allowed the company to build a team and smash its first-year housebuilding target.
Tip #3 – Remember Your Margins
Some businesses take on jobs without considering the numbers behind them. Take ActionCOACH client Property Repair and Maintenance as an example:
Property Repair and Maintenance had all sorts of cash flow problems when they came to ActionCOACH Ian Lane. The admin manager didn’t bill properly when invoicing and they took on a lot of small jobs.
This created a problem with margins. Ian discovered that the business spent too much on many jobs compared to the revenue it received. The simple act of setting a minimum price for their jobs helped them to create stronger margins. And that meant more cash flowing through the business.
Four Steps for Calculating Cash Flow
How do you know if you have cash flow problems? This four-step method for calculating cash flow should help. Each covers a specific area and combine to give you a final figure.
Step 1 – Operational Activities Net Cash Flow
Subtract your cash outflow from your cash inflow for operational activities. Inflow includes:
- Any cash received for providing services.
- Cash interest.
- Dividends.
- Receivables.
Outflow includes:
- All cash paid as salary to employees.
- Money paid to suppliers.
- Money spent on delivering the service.
- Any fees, fines, or interest.
Step 2 – Financial Activities Net Cash Flow
Again, you’ll subtract your cash outflow from cash inflow for your financial activities. Inflow includes:
- Income generated from stocks and investments
- Money from loans.
- Cash from business contributions.
Outflow includes:
- Money you spend to acquire equity or repay debt.
- Cash spent on buying back stocks.
Step 3 – Investment Activity Net Cash Flow
You’ll also subtract your outflow from your inflow for all investment activity. Inflow includes the cash collected from selling:
- Bonds
- Principal notes
- Property
- Equity
- Equipment
Your outflow is any expenses related to acquiring these assets.
Step 4
Create a total from the three net cash flow figures. You instantly see what’s happening to the money in your business.
How we can help
Getting a grip on your business’ cash flow is key to your success. You don’t want to end up like the many thousands who’ve gone out of business due to cash flow problems. You now understand the common issues that businesses struggle with and how you can resolve them. Hopefully, you also have a better understanding of your business’ financial figures.
You can also see that ActionCOACH has helped many clients to manage their cash flow. We can do the same for you. Click here to book a discovery session and start working with an ActionCOACH so you can bring your cash flow under control.
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