Read on to learn the common ways cash flow is mismanaged — and what CEOs can do about it.
An all-too-common source of trouble for small and mid-sized businesses is the failure to successfully manage cash flow. Cash flow is the lifeblood of a business, and if it’s not managed properly the company won’t survive for long.
What are the most common ways cash flow is mismanaged?
Cash Flow Mismanagement: Receivables
The trouble begins with failure to adequately manage receivables. When receivables get out of hand, running 60 days or more, your customers are using money that should be yours.
That cash flow failure in turn leads to trouble paying your own suppliers and vendors, who may respond by asserting that if they are not paid in a timely fashion, they are going to start shipping goods cash on delivery. The message from those suppliers essentially is, “We’re not going to be your banker.”
Cash Flow Mismanagement: Pricing Strategy
Cash flow management problems can also result from the inability to price your goods and services correctly.
In many cases, companies experiencing problems are under-pricing products and services. Even a tendency to slightly under-price can cause cash flow problems over time, as that slight differential inexorably builds up to a substantial cash flow shortfall.
Compounding the problem, this cash flow situation cannot be quickly rectified. The difference can’t be made up in one price increase, as it will likely be too much for customers to tolerate. Reviews of pricing must be tackled on an annual basis.
Cash Flow Mismanagement: Paying Attention to Margins
Companies tracking cost of goods sold, or cost of sales, must recognize those are direct costs — such as raw materials and subcontracts — related to sales. Accept a price increase from one of your vendors, and your margin has just been eroded. That can only be overcome by cutting costs elsewhere, or increasing pricing.
Whether you cut costs or increase prices will vary on a case-by-case basis, but either scenario presents obstacles. Most small businesses are hesitant to hike prices. But conversely, there are only so many ways you can cut costs.
If cash flow problems are not addressed, they will only fester and become even bigger issues. Typically, cash flow management issues result from inexperience. The business owner has no experience in analyzing cash flow problems. That‘s why it‘s important to either consult with a seasoned expert in these matters or hire an interim CFO. I’ve dealt with scores of companies with cash flow challenges, and have been able to counsel CEOs in making strategic financial decisions that have altered their companies’ fiscal trajectories.
Does your company have cash flow management issues? Let’s address those problems together, before your company’s lifeblood is drained.