Get the facts, know what the causes of your cash flow problems are!
1. Declining Sales and/or Declining Gross Profit Margins
a) Declining Sales
- Declining sales have a devastating effect on your cash flow as a relatively small decline can cause a massive reduction in your profitability.
- This typically occurs when economic conditions deteriorate, there is an increase in competition from global competitors, new competitors enter your market, or your industry declines.
- As sales decline your overheads will probably remain unchanged so net profit decreases rapidly.
b) Declining Gross Profit Margins
- Declining gross profit margins have a devastating effect on your cash flow as a relatively small decline can cause a massive reduction in your profitability.
- Typically occurs when there is pressure on sales.
2. Your Business Is Unprofitable
- Simply put, you are spending more than you are charging to provide your customers with goods or services. For example for every $1,000 you charge your customer you are spending $1,050! That is for every $1,000,000 you earn you are spending $1,050,000!
- Inevitably your losses will accumulate to the point of having to borrow more money just to stay in business. But eventually, you will come to the point where it is neither wise nor possible to borrow more money and you will have to sell your business, close it down, liquidate it, or someone else will liquidate it for you, for example, the Australian Taxation Office.
- A much better solution is to take immediate action to restructure your business to generate strong and sustainable profits. The quickest way is to engage a very experienced business turnaround firm to guide you through this process and drive implementation.
3. You Have A Natural Negative Cash Flow Business Model
- You sell on credit terms, 30, 60, or even 90-day terms, but you have to pay your payroll, rent, overheads weeks if not months before you are paid by your customers. And your payment terms with your suppliers are shorter than the payment terms you have given your customers.
- You carry imported stock which you have paid for weeks or months before it lands in your warehouse.
- You are paid by way of progress claims for which you also provide credit so you receive payment long after you have paid your direct factory expenses or subcontractors and materials expenses. Furthermore, retention payments are withheld by your head contractors or by your customer.
There are ways to address every one of these circumstances which involve redesigning your business model and also using appropriate means of financing, most of which are still available, even if you are already in financial distress.
4. Excessive Debt and Capital Expenditure and/or Excessive Personal Drawings/Benefits
- High repayments due to excessive debt and/or repayment of loans over too short a period. This particularly applies to vehicle and equipment loans and lease repayments which are typically structured over relatively short terms with low or nil balloon or residual values.
- Capital expenditure funded out of cash flow instead of being financed over the useful life of the asset, this puts pressure on cash flow.
- Funding purchase of personal property assets or the repayments on these properties far beyond the capacity of your business to sustain these payments as well as meeting the ongoing payment of all business expenses within normal trading terms including taxes and superannuation.
- Excessive living and lifestyle expenses.
5. Poor Stock Or Poor Credit And Debtor Management
- Poor stock management, such as carrying stock that doesn’t sell through, carrying excessive levels of stock, not clearing discontinued or obsolete stock, poor demand planning, undisciplined purchasing habits, or a poor stock management system to name a few.
- Poor credit management that is no or poor credit approval processes before providing customers with credit which will sooner or later result in bad debt write offs and in the worst cases will result in failure of your business.
- Poor debtor management which includes lack of disciplined collection of debts due by customers, allowing continued credit when customers have not paid their bills within company credit terms, and lack of regular reconciling of debtors’ accounts.