Cash is the money a company has in hand and in its bank accounts. Therefore, cash management is a cashflow management vital task that managers must lend particular importance to.
Each year, companies are faced with unexpected events (strikes, sudden drops in business, etc.) that lead to significant cash management problems, and in some cases, force them to close down. Nevertheless, challenges are part of company life and facing cash management issues doesn’t always lead to going out of business, especially if you follow our guide to help manage the situation !
1 - Identify the cause of cash flow problems
Profitability Problems
Insufficient Turnover
This is a very well known cause that leads to cash flow problems in a business.
A lack of Turnover can become a cash flow issue because when there is not enough money coming in, you find yourself facing difficulties when it's time to pay your expenses.
Insufficient Turnover can have several causes:
- Not enough time spent developing the business or inefficient business development actions
- Inappropriate price positioning (your products / offers are too expensive compared to the competition)
- A new player in your market
- A communication or marketing strategy that no longer works
- Lack of product diversity
- Positioning that has become inadequate
- Unhappy customers who purchase less or not at all
- Excessively high expenses that undermine the company's financial health
Perhaps you have too many employees to pay, unfavourable contracts with suppliers, too many fixed costs, a high electricity bill, etc. In a word, there are many expense items in a company. And if one of them turns out to be too costly, it could quickly weaken your cash position. Here is a method for identifying unnecessary costs: Go through your expenditures and your invoices with a fine-tooth comb and identify the abnormally high amounts on your projected cash flow budget.
If in doubt, don’t hesitate to consult average rates by checking competitor websites or asking for new estimates. If you can, try to compare your cost levels with those of your competitors. If, for example, a supplier item is two times higher than that of your peers, you can no doubt make some savings.
Low Sales Margin
The sales margin can be calculated using the following formula:
Sale of Goods (excluding tax) – Purchase cost of goods sold
This is an area that needs regular monitoring as it is easy to sell large quantities without making sufficient margins on these sales.
But beyond the overall dimension, it is even better to reason on a case-by-case basis: by determining your mark-up rate on each of your products or on each offer, it will be easier to identify those that are not making enough money compared to your forecasts. Many businesses find themselves facing cash management issues because they sell at a loss without necessarily realising it!
Customer Payment Issues
Excessively long payment times
This is a point that business people fail to take into account, yet it’s vital! A business may indeed sell as much as it can, but if it hasn’t got the finances to cope with its customers’ payment terms, it will find itself facing cash flow issues.
Even a profitable business can therefore end up in a tricky situation, or find itself forced to suspend payments! And this can be the case even if you have an excellent value proposition and a sizeable customer base.
When you grant your customers payment terms, be careful to keep some flexibility: because you can always find yourself facing late payments. The key therefore lies in anticipating and carefully choosing your payment terms, which we will come back to in the second part of this article.
Too many outstanding payments
Even worse than late payments, outstanding payments are a real disaster for cash flow in small businesses. As a result: you generate losses, you have no spare cash, and you in turn end up unable to pay your suppliers.
And once you are in this vicious circle, it is often very difficult to get out of: each year, many companies have to file for bankruptcy because of recurring unpaid amounts.
To limit the risks at this level, remember to do a solvency check on your customers before granting any payment facilities. You can also take out credit insurance that helps to cushion the shock if a customer fails to pay. As the saying goes, prevention is better than cure.
Inventory-related Issues
Poor Inventory Management
Having too much stock is problematic for a company. The bigger your stock, the more money you have tied up, and the less available cash you have. To deal with your cash management issues, make sure you manage your inventory in line with your needs (but being sure to have sufficient stocks to avoid shortages).
A superficial stock-take can also be a cause of cash-flow problems: If, for example, you forget to count a part of your stock, you end up with “idle” money without even knowing. Not only will you not be able to sell it until you find it, but this forgotten stock will continue to burden your cash flow until you do.
Insufficient Working Capital
As we said above, cash-flow problems do not necessarily stem from a lack of sales: a business can quite easily be facing cash issues even though it makes a lot of sales. So what’s the problem?
The answer is its working capital. This is the sum of money available to a business to pay its expenses (wages, suppliers, rent, etc.) before it receives its inflows. If its working capital requirement is higher than the working capital it actually has, it will encounter cash-flow difficulties. Hence the importance of regular cash monitoring.
For instance, a business has a working capital of $50,000. At the beginning of March, it signed several large contracts that should bring in a total of $600,000. However, the customers will only pay after 60 days, so not before the beginning of May. At the end of March, the business finds itself short of cash: its $50,000 are not enough to pay the wages, the raw materials purchased from suppliers and all the other expenses (electricity, etc.).
Working capital requirement is therefore truly important for a business. So don’t be misled by a high volume of sales!
Crises and Unforeseen Events: other causes of cash flow problems
Crises and Unforeseen Events
You no doubt think that an unforeseen event is by definition… unforeseeable. And you’re right! Strikes, machinery breakdowns, stock shortages at a supplier's, equipment theft, a new competitor you had not spotted, and more recently the Covid-19 pandemic… A lot of unforeseen events can occur during the existence of a business. And although it is not necessarily possible to anticipate everything, we can't advise you enough to prepare yourself for hard times. It is not uncommon for a manager to neglect the unexpected in their business and be forced to shut the company down at the first unforeseen event. So don't plan too tightly, and keep some room for manoeuvre to weather the storm if necessary.
Growth Crisis
Your business is booming, the orders are pouring in and, what’s more, you’re launching a new product! Yet everything is going wrong, despite your (overly) rapid growth. You’re heading for a growth crisis! It is generally characterised by excessive demand and the company’s inability to meet it without jeopardising its cash position.
A start-up, for example, sees demand suddenly soar for its new product: to have extra resources, it decides to buy new machinery and take on more staff. This then eats up cash but the reduction is not offset by an increase in sales because the time it takes to receive and commission the new machinery and train the new staff is too long.
The start-up is therefore weakened by its investment and cannot keep up, which leads to manufacturing delays and unhappy customers. This leaves you with a stock of new products that you can't sell because your customers have gone elsewhere. And at the same time, your creditors pressure you to repay them. These symptoms are typical of a growth crisis and create substantial cash-flow problems.
2 - Take action fast to minimize your losses
In order to deal with any crisis situation, it is important to create several scenarios to anticipate your cash flow. These will help you make the right decisions in the context and better manage the unforeseen circumstances. For this, you can use Agicap.
Don't hesitate to be really pessimistic when developing your scenarios. It is always better to expect the worst! Prepare four impact situations:
Best case: nothing changes, current events have little or no impact on the business Middle: (30% drop in turnover) Serious: (60% drop in turnover)
Worst case: this is the worst scenario, and your inflows totally come to a halt
This is where Agicap can help. Our cash management software incorporates a "scenario building" module in which you can design and measure different cash-flow impact scenarios.
Now that you have the big picture, here are some steps to take:
Increase your Turnover
Do more Canvassing
This is the most obvious solution! Selling is often considered to be the key in any business. And to sell, you need to canvas! It is common for a business with cash-flow problems to have a low turnover due to insufficient sales. The first thing to do is therefore find more customers: telephone follow-ups, exclusive offers, email campaigns, appointments, participation in trade fairs, hiring sales representatives, etc. But beware, because mass canvassing is not necessarily the most effective solution for a small business. Instead, opt for precise and efficient canvassing to target an audience more likely to be interested in your offer.
Put Prices up as far as Possible
This is a tough choice that many business people are afraid to make. And it’s understandable because a badly thought-out price rise can turn your customers away, which is the last thing you need if your cash position is in a bad way.
However, if you prepare the ground and proceed step by step, it is a way of improving your margins, and therefore of replenishing your cash flow quite effectively.
First, avoid putting your prices up overnight: notify your customers that your prices will be going up in a few weeks’ time. Second, you don't have to increase all your prices. Instead, you can implement a strategy aiming to push up the average amount your customers spend, particularly with packages containing several items. Lastly, make sure you explain the reasons for the increase whenever possible: a faster delivery service with real-time tracking, a regularly available customer service, or a more premium offer for example.
Try out New Sales Channels
As a small business, you might only use one distribution channel to sell your products. But what if you tried out new ways of marketing them? Think about how your customers would like to buy your product: fast, via an express online order? By enjoying a great customer experience in a store?
Today, you can even sell on social media networks, so your imagination is your only limit! But be careful, because some distribution channels may be more suited to your business than others. Similarly, while distance selling is potentially faster, it incurs additional costs, which the customer will not necessarily pay.
On the other hand, in-store selling can be an excellent way to increase your margins! So, analyse your ways of selling and take action accordingly to turn your cash flow around.
Review your Communication Strategy
Today, no one communicates in the same way as we did 50 years ago, and this is particularly true in business: with social media and websites, etc., a good communication strategy can be a tremendous help in boosting sales and filling the cash shortages your company is facing.
If this is something you feel you need to work on, here are the questions you should ask yourself to better define your communication objectives and subsequently review your strategy:
- What is my target? Can I segment it into different sub-categories?
- How am I positioned compared to the direct competition? How can I stand out?
- What message(s) should I convey to fit with my positioning?
- Can I determine the goal or goals of my communication strategy?
Reduce or Defer your Expenses
Cash flow problems can be caused by many things, and excessive expenses is one of them. Don’t worry, here we are not talking about austerity measures or mass redundancies. The aim is to spotlight the unnecessary expenses that you could avoid in order to improve your cash flow.
“How can I address my cash flow issues?” “Reducing my expenditures should be simple” more than one business manager would say.
While it’s a good idea, putting it into practice is not necessarily easy and managing to identify unnecessary costs can be a tricky task.
First, you need to analyse your expenditures, item by item. And what about comparing the cash flow forecast you defined with what you have actually achieved? You might realise that some cost items are much higher than expected. Start by reviewing all your fixed costs. Here are some examples of expenses you can reduce:
- Rent
- Suppliers
- Software subscriptions
- Electricity, water, gas and fuel bills
- Marketing / Communication costs
- Health insurance
- Inventory Management
Then do the same with your variable costs.
Once you have an inventory of your expenses, check whether any amounts are abnormally high and if they are, whether you can reduce them by avoiding waste, renegotiating better contractual terms, grouping purchases to reduce costs, etc.
Can’t reduce your expenses? Then why not defer them? Don’t wait to be in difficulty to activate this lever! Below is a short list of costs that can be deferred or frozen:
- URSAFF payroll taxes (only employer and employee contributions are compulsory): you can defer payment of your URSSAF contributions by up to three months
- Freezing pension and health insurance contributions
- Deferring payment of land tax, corporate tax and any other tax
Optimize your Stocks and Fixed Assets
Rid yourself of Inactive Inventory
This is a major issue for any company that has to keep part of its production inactive while it waits to sell it.
Bear in mind that your stock is tied-up cash. A business can quickly find itself in difficulty because of excessive stock, beyond what you had planned. If a product isn’t selling well but you have produced a large quantity, your storage costs will rocket and threaten the company’s cash position.
So what’s the answer? Destroy the goods? Give them away? This would amount to shooting yourself in the foot and cause you to lose a lot of money. However, as soon as you see that one of your products is not selling and that the remaining units are likely to remain dormant in stock for a long time, don't hesitate to launch special offers to clear them as quickly as possible.
But be careful, because while the aim is not to make an astronomical profit (you want to empty your stock to limit costs), do not sell at a loss either!
After that, make sure that you optimise your stocks and limit them as much as possible. For example, prefer a supplier who can deliver fast, even if its prices are slightly higher: this can help you reduce your stocks and deal with your cash flow issues.
Choose Leasing over Buying
You need to buy a new vehicle for a newly hired sales person.
But there is a good way of doing things that can save you from a working capital shortage.
If you opt for a lease car, you will pay a few hundred Euros per month (depending on the model) instead of having to spend several thousand in one go.
This leaves you with more spare cash to pay your fixed costs while you wait for payments from your customers.
Reduce your Customers’ Payment Terms, and Negotiate longer terms with your Suppliers
Limit payment terms and reward customers who pay immediately and in full
When a business is facing cash-flow problems, the priority is to get money coming in as quickly as possible, in order to avoid defaulting on payments to creditors. It is therefore necessary to reduce the WCR (working capital requirement) and secure rapid inflows of cash. And this starts with your customers.
If you used to be able to grant most of them a payment term of 60 days, you should now give them 30 days or even request immediate payment.
If you are afraid of losing your customers by asking them to pay directly, try offering a discount for any invoice paid cash (however, don’t offer 50% off, 4 or 5% can already be quite a sum). This will show that you are not a bad vendor, especially as most companies like to save money on their invoices, even if they have to pay faster to do so.
Finally, take the time to identify any customers you regard as unreliable: a customer in receivership, a customer with a bad credit rating, or simply a customer with whom you have already had problems in the past (for late payments in particular). Once you have drawn up your list, be uncompromising and demand cash payment from these partners: remember that the future of your business is at stake, and your cash position is not necessarily very sound.
Pay your Suppliers as Late as Possible
For this tip, you must reason the other way round: your aim is ALSO to keep as much cash as possible. You need it to stabilise your finances and get your business back on track.
With this aim in mind, to avoid ending up suspending payments, try to negotiate better terms with your main suppliers. Try your luck with your long-term partners first, as they are more likely to give you the time you need. If you have a payment term, wait until the last few days before paying your bill: this is a good way of limiting your working capital requirement.
Gain access to Financing
Negotiate a Bank Loan
By negotiating a cash flow loan, you rapidly have a cash facility. However, you will have to negotiate with your banker and show that you are capable of managing your cash flow to be able to repay your debt.
In practice, if you are not able to present a convincing case that proves you are running a credible business with good prospects for development, you will have already taken a big step forward. But once you have obtained your loan, make sure you think about the interest you will have to pay on it.
Apply for an Overdraft
Negotiating an overdraft is another funding possibility that can help out in many situations. Ideally, you should negotiate an overdraft when everything is going well. Not only will you be able to obtain advantages, but also, if your situation deteriorates, you can benefit from the overdraft automatically.
Here again, remember that an overdraft comes with interest which you will have to pay. So make sure you take it into account in your cash flow forecast so you don't get caught out just when you thought things were looking up.
Other Forms of Financing
Other, more “exotic” modes of cash funding may also be appropriate to cope with cash flow problems.
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Factoring allows you to “sell” your invoices to a bank so that you receive the amount immediately if necessary. This is a very useful alternative if your customers have long payment terms and your cash is low.
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Crowd-funding (particularly via the platform Kickstarter) is also a method that can work but it is not an end in itself. The idea is to appeal to the generosity of Internet users by presenting your project and setting donation levels to be reached above which your company will be able to make a fresh start. But be careful, because this method is not as easy as it seems. You really need to be able to tell your company's story and convince potential donors to take an interest in you.
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Finally, there is “love money”. Behind this rather strange name lies an extremely simple practice of asking family and friends for financial help. Again, this is not necessarily the solution you should go for directly, but in some cases love-money financing may allow you to save the situation and get back on your feet.
Use Cash Management Software
Our last piece of advice focuses on technology! Since we are living in the digital era, why not turn to tools that can make life easier and turn your cash position around.
While many small and medium-sized businesses use Excel for their cash management, today, there are many dedicated tools available to simplify their cash flow forecasts.
Agicap is a cash management software programme that allows business leaders to automate their forecasts and have a better view of their upcoming inflows and outflows, while taking their payment terms into account.
More reliable and user-friendly than Excel, it is specifically designed to meet the needs of small business owners to help them manage their cash flow more efficiently while saving time and avoiding unpleasant surprises.
Need advice on managing your company's cash flow? Discover our complete video guide:
In a nutshell
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If a cash flow problem arises, take action rapidly to identify the causes: too many late customer payments, too much stock, insufficient turnover, etc. The list is long, and you might feel like you are looking for a needle in a haystack. So, to avoid wasting time, you need to get organised: look through the invoices you have issued in search of an unpaid bill, dig into your cash flow forecast and compare it with the various expenses you have had to pay to make sure you have not forgotten to defer a significant pay-out... It is important to proceed in an organised manner if you want to avoid spending too much time looking for the cause of your cash flow problem. If, despite your efforts, you are unable to identify the source of the difficulties, do not hesitate to call on external support (e.g. a business consultant) to help out before it is too late.
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Once you have found the source of the cash flow problem, do something about it right away: too many companies go out of business due to minor difficulties that get worse because they have been neglected. To solve a persistent cash flow problem, you have a whole host of options to choose from: loan, overdraft, inventory reorganisation, payment term optimisation and even higher prices. Depending on the problems encountered, some will be more appropriate than others, so be sure you are making the right decision before you act on it!
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