7 Common Cash Flow Issues & How to Fix Them
Cash flow-related issues are one of the most problematic for organizations. A study by Jessica Hagen of U.S. Bank showed that 82% of businesses that failed had some sort of cash flow issue. However, many cash flow issues are silent killers. Companies may not recognize that they have cash flow issues–or, more commonly, may know that they have cash flow issues but are not sure what is causing them.
In this article, we discuss some of the most common cash flow issues businesses face, how to identify them, and how to fix them.
Common Cash Flow Issues and How to Fix Them
One of the first steps to determining your company’s cash flow issues is to dive into your financial analytics. If you don’t currently have robust financial reporting tools, then those systems should be implemented immediately. One of the biggest mistakes a company can make is flying blind with their finances. This almost always leads to overspending, under-charging, delinquent accounts, and fatal cash flow issues.
Below, we discuss some of the most common cash flow issues we’ve found over the past 2 decades as we’ve provided outsourced CFO services to companies of all sizes.
1. The Company is Not Sure the Cause of the Problem
Typically, if your spending exceeds your cash, then you have a cash flow issue. However, knowing you have a cash flow problem is not enough–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.
If you’re not sure whether your current cash distribution is standard, talk to a financial expert. An experienced CFO will have baseline knowledge, industry expertise, and will be able to perform a deep dive into competitive comparisons. This will help determine whether you’re on par with companies in similar industries and lifecycle stages, or if you’re out of balance somewhere. Then you can begin diving into your actual expenditures, determining where your spending might be higher than necessary, and where you can make strategic cuts.
2. The Company Does Not Have Cash Flow Benchmarks
How do you know what you should be spending? Most budgeting processes include managers submitting a budget for their arm of the company and negotiating cash allocation based on perceived need. However, in most cases, these budgets do not have a data-backed 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 part-time CFO with experience in the industry and with other organizations at a similar stage of growth. This helps you build cash flow benchmarks to guide that can inform when your company may be spending excessively in a particular area.
3. The Company’s Expenses are Too High
This is by far 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?
In many cases, renegotiating vendor contracts can have a positive impact on cash flow. In other cases, spending cuts may be made to decrease expenses while minimizing revenue impact. Be sure that expense cuts are strategic. The person making the cuts should be able to remain objective and practical, not cutting for the sake of cutting, but strategically cutting to reduce waste while maximizing efficiency.
4. Inventory Regularly Ties up Cash Flow
If you’re currently experiencing cash flow issues that are not caused by overspending, 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. This minimizes the amount of assets (including cash, inventory, storage space, & management) you have tied up at a given time. What can you do to optimize your inventory to hold it for the shortest amount of time possible?
You should have a clear understanding of your sales cycles and an educated forecast for future cycles. This helps you predict inventory needs and fluctuations for more informed purchase decisions.
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. Analyze your existing sales. Are there products that have reduced (or even negative) margins?
5. The Company’s Gross Margins are Too Low
A company’s gross margins are typically a cash flow issue when an organization doesn’t have a clear understanding of their costs. A key to making money in business his having informed data on actual costs. In some companies, especially those experiencing a high level of growth, many costs are overlooked or not tracked properly.
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. The Company is Unsure What Their Cash Flow Looks Like
One of the biggest signs that your company may be experiencing cash flow problems is if you’re not sure what your cash flow looks like. It’s easy to spend money, especially when you feel like you have enough sales rolling in that it’s not raising any red flags (yet). However, this puts your business at a greater risk of having cash flow issues go unnoticed until they’re a bigger, more difficult-to-fix problem.
If you’re not sure at all what your cash flow looks like, then it’s time to take 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. The Company Isn’t Sure if Their 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 of financial strategy: 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.
How can we help?
Is your company currently experiencing cash flow issues, or would you like to dive into your finances to see how you can improve your margins and shareholder value? Contact Preferred CFO today.
*This post was originally published in February 2018 and was updated in February 2020.
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.
You may also be interested in…
If your company is preparing to raise capital or if you are currently writing a business plan, you may be getting ready to build your 5-year financial forecast. It can be intimidating to plan this far into the future—as well as knowing what kind of projections to...
On September 25, 2019, Troy Skabelund presented a webinar for Navigator Business Solutions to discuss 5 common pitfalls many businesses make when financing inventory. These issues, he explains, are often blind spots to businesses that hold inventory. In this webinar,...
What is a Virtual CFO? A virtual CFO is an off-site, part-time CFO providing high-level financial strategy services. A virtual CFO will help with financial forecasting, systems optimization & reporting, maximizing profits and shareholder growth, preparing for...
When to Spend Money to Make Money (and When to Not) When it comes to business, most of us live by the axiom that cash is king. We’re stringent with our overhead, careful with our purchases, and strategic with our hires. We also know that there are times you need to...
When a company first starts out, the owner is often a Jack-of-All Trades, doing everything from interfacing with clients, developing product, and keeping the books. Although dipping into different disciplines can be exciting, there does come a time when delegation is...
Poor cash flow – How to recognize it and how you can make sure it won’t be a problem We know that the majority of small businesses fail within the first five years, but a recent study by U.S. Bank drilled down into the reasons why this occurs. In their study, they...
On average, fractional CFO costs $3,000/month to $10,000/month. The most common agreements are between $5,000-$7,000/month for most small- to mid-sized companies. The cost of a fractional CFO depends on the scope of work provided, the size and complexity of the...
Which outsourced CFO services can benefit your company? It depends on your goals. Unlike controllers and CPAs who typically have a more straightforward job description of record-keeping, bookkeeping, and tax management, an outsourced CFO's role changes based on the...
What is Cash Flow and Why Is It So Important? Many financiers and business owners will agree that there is one four-letter word that is more important to a company than any other. C-A-S-H. Cash within a business is much like the waves of the ocean. It is constantly...