The 7 key causes of poor cashflow

Poor cashflow is the number one reason why businesses fail. Therefore, it is crucial for business owners to understand the causes of poor cashflow and how to fix them:

1. Accounts receivable process

A poor accounts receivable process will result in debtor days (the time between billing and banking) being too high. This will stifle your cashflow. There are many strategies to minimise debtor days including tightening your Terms of Trade, offering prompt payment discounts and streamlining your billing process.

2. Accounts payable process

A review of all suppliers’ terms may identify ways to improve cashflow and potentially achieve better Terms of Trade. Implementing budgets, streamlining your payments process to maximise prompt payment discounts and avoiding late payment penalties is just the start.

3. Inventory process

Carrying stock for too long means full shelves but an empty bank account. This is no different if you’re a service provider with work in progress that is yet to be billed. Reviewing your stock ordering systems and stock control processes (to name a few) will identify strategies to ensure cash hits the bank sooner.

4. Inappropriate debt/capital structure

Often significant cashflow and interest charge improvements can be achieved with a regular review of existing debt. Maybe your debt/capital structure could be improved, or perhaps your debt should be consolidated and paid off over a longer term. Maybe you need to review and adjust what you’re drawing from the business, or perhaps the business needs a capital injection to fund its growth.

5. Overheads too high

Every business should do a thorough review of its overheads each year. Reviewing the effectiveness of your marketing spend, going paperless, putting expense budgets in place and changing your technology platform are some simple ways to reduce overheads.

6. Gross profit margins too low

Our gross profit margin is what is left from sales value after variable costs are deducted. There are a large number of strategies that you can implement to increase your margin, such as focusing on rework and wastage, reducing stock shrinkage and improving team productivity, just to name a few.

7. Sales levels too low

If the current sales levels don’t support overheads and other cash demands on the business, then the business is not currently viable. If in high growth mode, a financing plan will be necessary. If not, we need to consider how we will grow sales. To grow sales we need to focus on customer retention, generating leads, improving sales conversion, customer transaction frequency and pricing strategies.

Cashflow planning is the best practice and critical to survival and growth for any business. It’s more important than ever to effectively manage your cashflow in uncertain times as we have seen many businesses struggle with cashflow during COVID crisis.

As your accountants, helping you look ahead with confidence is core to our purpose!

Setting targets and monitoring your actual cashflow against your forecast will also enable you to predict large cash outflows and respond to changes in your business.

Cashflow management is a part of our Virtual CFO service that can help you identify and fix the underlying causes of poor cashflow in addition to preparing a Cashflow Forecast for your business. With specialised skills and extensive experience, our KMT advisers will work with you to set goals for improvement and implement strategies to maximise your business cashflow.

Contact us today to learn how to improve your cashflow management!

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or professional advice from a qualified accountant or financial adviser at KMT Partners.