7 Common Cash Flow Issues & How to Fix Them
Cash flow-related issues are one of the most problematic for organizations. In fact, a study by Jessica Hagen of U.S. Bank showed that 82% of businesses that failed had some sort of cash flow issue.
Here are 7 common cash flow issues and how to fix them:
1. You’re not sure the cause of the problem.
Typically, if your spending exceeds your cash, then you have a cash flow issue. However, in order to address the issue, you have to know what’s causing it. A good place to start is to categorize your spending into general & admin, research & development, sales & marketing, operations, and COGS. Note the percentages in each category. Does your current cash distribution make sense? If not, then the category in which you seem to be overspending is a good place to start looking for adjustments that can be made.
2. You don’t have cash flow benchmarks.
How do you know what you should be spending? It’s a common cash flow issue for business owners or COOs to make cash flow decisions without any real basis of judgment. A wiser approach is to benchmark yourself against other companies in your industry and within your lifecycle stage. Some of this information can be found online or through conversations at networking events. Another option is to partner with a temporary CFO with experience in the industry and with other organizations at a similar stage of growth to help build cash flow benchmarks for your company.
3. Your expenses are too high.
This is one of the most common cash flow issues for organizations of almost any size. While it’s true that you often have to spend money to make money, expenses should still regularly be scrutinized and expenses should be made strategically. What regular expenses does your organization pay, and are there any that should be eliminated or renegotiated? Based on the benchmarking from #2, are there materials or services you may be overpaying for or that you may not need at all? Are there certain materials or resources that are being used inefficiently that could decrease expenses if operational changes were made?
4. Inventory regularly ties up cash flow.
It may be time to reanalyze your inventory and sales cycles. The optimal way to house inventory is to have it in stock for the shortest amount of time possible while still making sure you have the appropriate items in stock for filling orders. If you don’t have a clear understanding of your sales cycles and an educated forecast for future cycles, then you likely also have too much of your capital tied up in inventory. Another common inventory-related cash flow issue is assortment creep or adding merchandise that doesn’t actually significantly contribute to sales. Remember the 80/20 rule — 80% of your sales are coming from 20% of your inventory. What can you do to optimize your inventory to hold it for the shortest amount of time possible?
5. Your gross margins are too low.
This is typically an issue when an organization doesn’t have a clear understanding of their costs. Take a deeper look at your costs. Are there materials or services you’re paying for that you can renegotiate? Are there prices you should raise? Products you should cut altogether? Remember, if you’re losing money on your products or services then it doesn’t matter how much you sell; they’ll never pull you out of the red.
6. You’re not sure what your cash flow looks like.
If you’re not sure at all what your cash flow looks like, then it’s time to take a look a deeper look into your books. Where does cash come from and what are your expenses? Getting your books in order is one of the first and most important steps to analyzing your cash flow and preventing or resolving cash flow issues.
7. You’re not sure if your cash flow is good or bad.
If you’re not sure whether your cash flow is supporting or hurting your overall goals for growth and success, then you may be missing a critical strategy component: a financial forecast. The purpose of a financial forecast is to optimize your finances to support sustainable and efficient growth while taking the guesswork out of getting from where you are to where you want to go.
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Troy Skabelund has over 20 years experience as a CFO and Systems Expert for organizations of all sizes and industries, including 12 years at the Walt Disney Company. He specializes in analyzing and designing financial systems with experience in both proprietary and 3rd party solutions.