A business’s healthy cash flow is imperative to its success, especially for small to medium businesses. A report by The Australian Securities and Investments Commission found that 44 per cent of failed businesses had high cash use or inadequate cash flow.
The report, conducted around 8354 reports from external administrators, indicated that small to medium-size insolvencies “dominated” the report’s statistics. Additionally, 85 per cent of collapsed businesses had assets of below $100,000.
The report found that small to medium businesses struggle with cash flow as it is taking longer for them to collect money.
When a business has poor cash flow they can easily come to an immediate halt. You may find suppliers refusing to provide stock due to late payments; you can’t invest in your business growth; you might even have to lay off several employees.
Basically, a business will fail unless they can generate more cash flow.
With all this doom and gloom in mind, let’s look at the positive: there are plenty of ways to generate more cash flow.
So, what are they?
If your business spends more than it earns, this will greatly diminish cash flow. The same goes for selling your products and services at a loss. Discounting may help attract new clientele, but continuing to sell products and services at a loss will not generate more cash for your business.
Know these two figures:
Knowing the above numbers will ensure you know whether you’re operating in the green or red, and therefore have an understanding where your cash flow stands.
It is far more expensive to attract new clientele than it is to retain existing customers. Promoting repeat business is a far less costly exercise than that of attempting to attract new customers. This can have a serious impact on your cash flow if you are seriously looking at creating more cash.
Consider VIP offers, frequent-shopper discounts, loyalty programs. However, you need to be on top of what you can afford to discount: don’t just go handing out free coffees all over the place, as all this can add up and become detrimental to cash flow.
If you fail to follow up on overdue accounts, you may experience poor cash flow. Ensuring your debtors pay you consistently and on time ensures you can meet your own obligations to employees and suppliers.
Holding too much stock will increase storage costs and tie up cash. There has to be a balance between having enough stock to supply the demand without overstocking and damaging cash flow.
One of the most important benefits of good cash flow is that it allows you to invest ingrowth, and therefore your income. Have you reviewed your stock’s pricing recently? You might want to consider increasing the number of products you have or running a big advertising campaign to attract new customers.
A solid, positive cash flow ensures you can continue to invest in your business, employ new staff or even buy new stock lines, all of which can help your business grow steadily without damaging cash flow.