The Real Reasons You Have No Cash
Are you sick of worrying about paying your bills and still having enough money to pay your GST and tax? This is a common complaint from small business owners who universally find lack of cash to be one of the toughest issues to overcome.
Cash flow budgets are a fantastic tool that we love and recommend you use, but they only help manage the problem, they rarely fix anything. If you aren’t working on addressing the real underlying problem, your business will continue to suffer, regardless of how well you manage your cash.
If you have problems with a lack of cash, it’s because there is a deeper issue that needs addressing. Something isn’t right in your business and once you find out what that is and fix it, your cash flow problems will disappear.
Think about it this way, being short of cash isn’t actually the problem, it’s a symptom caused by the real problem.
Most of the time, insufficient cash happens for at least 1 of the following reasons.
1 – You aren’t making enough profit (note there is a difference between profit and cash)
2 – You aren’t collecting the cash owed to you
3 – You are taking too much money out of the business for yourself
4 – You don’t have enough working capital in the business
In businesses that carry stock there is a 5th reason.
5 – You are holding too much stock (think of your stock as $50 notes on your shelves)
I guarantee that these are the real underlying problems in your business. Each of them can result in having a lack of cash and it doesn’t matter how well you plan your cashflow, until you identify why it’s being restricted, it will never be any better.
Let’s talk about what you need to do.
Examine your business model
Your business model is a short and simple document that demonstrates how your business can make profit. It covers the following:
- How you generate revenue (how many customers, average spend, etc)
- How much are your COGS or Direct Costs (in percentages)
- How much do you spend on variable and non-variable overheads (in percentages)
This will let you prove that your business is or can be profitable and is also scalable. Sometimes it will point our glaring issues in your business, prompting you to make changes and tweak things until they work. Ultimately it will help ensure you have adequate profit to achieve a healthy cash flow.
Systemise and automate Accounts Receivable
There are some great software apps that will link with your accounting software to automate the reminder and collection process. They have proven to be effective, especially in reminding customers when they must pay and then following up immediately after payment is due.
You should always monitor your accounts payable, even when you have an automated system in place. You must also have procedures that dictate what action you will take in the event of someone you is not paying.
Review your personal budget
Assuming you have a personal budget, it is a simple way to work out how much money you need to withdraw from the business. You need to know how much profit your business needs to generate to provide you with the lifestyle you desire. Compare that figure to your business model and budget/forecast. Is there a shortfall? If you absolutely need to withdraw $150,000 to live and your business is currently producing $120,000, you are going to have a cash issue.
This can be a little tricky, but a working capital shortfall just means that you don’t have enough money held in the business to fund your business cycle. Many of you need to buy stock or materials well in advance of your customers paying for them, these purchases are funded from working capital.
In a startup business, working capital has to be contributed by the owner e.g. depositing $100,000 into the bank account to pay for things until funds roll in. For an established business working capital is usually profit that has been retained from previous years.
A growing business needs an increasing amount of working capital and fas grow will usually outpace your ability to fund it.
Look at the working capital cycle of your business to work out if you are lacking working capital. A vast number of Australian small businesses are under capitalized and it is a huge cause of cash shortages.
Analyze Stock Turnover
How long is it taking to turnover your current stock? Your Inventory Turnover (how many times stock is bought and sold in a period of time) should be as high as possible. In many cases we find that the business is carrying too much stock and it sits on the shelf far too long. Your skill as a business owner needs to be deciding what stock you really need without compromising other factors such as store presentation or order fulfillment.
Now is the perfect time to fix your cash flow problems and leave the stress of not being able to pay bills behind. Make a plan to look at each of the above issues and come up with ideas about how you can implement change.