All businesses go through rough patches, and during those times it's likely that directors will experience some cashflow problems. The key to stopping a brief blip in your organisation's finances from turning into something more serious, such as liquidation or voluntary administration, is to be prepared.
Prevention is typically better than a cure, and the best way to avoid falling into cashflow traps is to be aware of the most common problems that businesses encounter. Even if there's little you can do to stop cashflow issues from occurring, there are usually options available to help you recover.
Let's delve into some of the reasons why your business may struggle with its cashflows.
More than 2,100 corporate insolvencies took place in Australia during the March quarter alone this year.
1. Unpaid invoices
Unsurprisingly, you'll quickly fall into financial strife if your customers and clients are taking too long to pay their invoices. There are many reasons why this might happen – you may need to improve your collection practices, the customer or their business could also be financially struggling or perhaps you don't offer any early payment incentives.
Recent Dun & Bradstreet research revealed that Australian organisations are actually getting faster with their trade payments. The average time nationally to settle an invoice was 44.9 days in the second quarter of 2016, whereas businesses took 49.2 days in the corresponding period last year.
Nevertheless, you could opt for debtor finance if unpaid invoices are creating problems for your business, which means selling your accounts receivable ledger to a third party at a discount to gain quick access to funds. You could also consider turnaround and restructuring services to see whether your invoice collection processes can be strengthened.
2. Expensive overheads
Another area where an operational restructure could significantly improve cashflow is your overheads. Running a business costs money, but these expenses can quickly spiral out of control if you're spending more on your outgoings than you're earning.
That's why you should examine all your overheads closely when experiencing cashflow problems and identify places where you could make savings. There are often plenty of ways to reduce overheads and get cashflow back into positive territory. Could your business relocate somewhere with cheaper rent? Are your staffing costs too high? Is outsourcing some of your processes a more affordable option?
These may seem like obvious solutions, but covering all your bases is crucial when you consider that more than 2,100 corporate insolvencies took place in Australia during the March quarter alone this year. The data, compiled by the Australian Securities & Investments Commission, noted that this figure was 6.8 per cent higher than the same three-month period in 2015.
3. Inventory mismanagement
Holding too much stock can be a common problem for businesses if they haven't optimised their inventory management systems. Some organisations may have the majority of their capital tied up in goods that are just sitting on warehouse shelves. Moreover, companies could face additional storage, handling and insurance costs when they have more stock than they need.
Having too little stock can be problematic for different reasons, as delays in shipping goods to clients may lead to frustration, reputational damage and lower sales. Eventually, these issues could also lead to cashflow problems.
Businesses can invest in inventory management software to improve their warehouse processes, which will automatically track stock levels and orders. If you're struggling to obtain stock from suppliers because you're a new company and they require upfront payment, purchase ordering financing is also potentially available.
4. Misjudged pricing
Setting prices for your goods and services can be difficult, particularly for new business owners who don't have much experience calculating how much time, resources and costs go into delivering a finished product. Often, start-ups will also set their prices quite low to gain their first customers and get themselves up and running.
You must analyse your operation and identify areas of weakness before they become major problems.
Eventually, the discrepancy between your costs and revenue will begin impacting your cashflow, so it's important that you address pricing to ensure you turn over a healthy profit once your overheads are covered. This will usually involve performing a comprehensive audit to analyse your gross profit margins.
The most obvious solution is to raise prices if they are too low. However, if this will lose you business, you can try to find cheaper suppliers or drop loss-making products and services as alternative approaches. Conversely, if your wares are too expensive, you may suffer cashflow problems because you're not making enough sales due to customers choosing more affordable competitors.
Tackling cashflow problems
As we can see, cashflow can be interrupted due to many different factors in your business, which is why you must analyse your operation and identify areas of weakness before they become major problems.
This is where Cactus Consulting can help. We are pre-insolvency experts, meaning we can examine your business and see what key threats could be affecting your performance.
If you would like to learn more, please contact us by clicking here.