We’ve surveyed over 10,000 business owners in the last ten years and almost without exception cash flow comes up as either the #1 or the #2 factor that keeps business owners awake at night.
You could be forgiven as a business owner for thinking that cash flow is the problem you need to fix, but you would be wise to look elsewhere for the real reason behind the problem. Better to fix the cause than the symptom, as doctors will tell you.
In our experience, working with over 500 business owners in the last 17 years, including in our business, we’ve found there are five basic causes of poor cash flow and a business owner will be far better off fixing these than trying to correct the cash flow itself. In fact, fixing these things will result in better cash flow than you’ve ever had before.
The first is a mismatch on value. Providing value to clients is what delivers margin or profit. And margin or profit is what keeps you in business. Lifting revenue is useless to you if you don’t also lift your profit. The core reason why businesses often have cash flow issues is they aren’t valued as highly by their customers as they need to be. This may not be an easy fix, but it is critical if you are to survive. The problem could be trying to compete on price; it could be poor communication of the value you offer. Whatever the reason, you need to lift your value in order to lift your cash flow.
The second reason business owners get into trouble is poor trading terms.Often Small Business chases big business as clients, but then gets caught by long payment terms, and an inability to fund their business whilst they wait 90 or 120 days to get payment. Many big businesses are realising the pain they cause Small Business and are reducing their payment terms, but this is still a big issue.
The third is poor systems. Business owners who just don’t get to the invoicing because they are too busy! You’ll find yourself with a lot of time on your hands if you continue to put off this critical action in your business. Accountants are often the worst at this as they choose to bill many Small Business clients just once a year and then wait for that big bill to be paid. Why not bill monthly? Or have a retainer? It doesn’t make sense.
The fourth issue behind cash flow problems is a lack of discipline on money and in particular spending it. Many business owners get into trouble because they assume all the money in their bank account is theirs and forget they have tax, super and wage obligations. Setting up a system where you know your numbers is critical to having a good handle on your cash flow. A business owner must know their numbers and be frugal in terms of expenses and costs in order to flourish and prosper in the long term.
The final issue we see in business is chasing revenue not margin. Business owners get fooled into thinking bigger is better so they grab every customer they can at whatever price they can, and with no feeling or strategy behind attracting ideal clients. They get bigger, and then they go bust because the growth comes at the expense of margin.
I recommend you read, Unscramble your Numbers by Amanda Fisher as a great guide to what you need to know in your business.
My thoughts in this article come from both experience and personal pain at making many of these mistakes myself, so I hope I can pass on some thoughts to help you avoid them in the future.
Poor cash flow is a symptom of many business processes and actions. Fix the right cause of poor cash flow in your business, and you’ll be well on the way to success. Ignore it, and start planning what you are going to do when your business goes bust.
Originally published on Smallville.