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Cashflow Challenges in Your Business

Cashflow Challenges in Your Business

Despite being profitable, many businesses cease trading because they do not have enough cash to pay their bills.

It’s always disappointing when months or years of hard work end with zero financial value because an owner has run out of cash to pay bills. Sometimes following a few simple rules regarding revenue, profit and cash might have helped to avoid the situation. As a starting point towards understanding these rules, the illustrations below describe how profit is generated from revenue and invoices when paid, deliver cash flow.

Profit Accounting Rule


Using this profit rule, over an accounting period of say three months, a business may generate on target revenue and profits. However, profit does not provide cash to pay employees, suppliers and all other expenses. This lack of cash causes financial pressure.

Cash Business Rule


Cash is available when a customer pays all or part of an invoice. (expenses incurred in providing the service or product are deducted in the accounts)

Therefore, a business must focus on a) invoicing for revenue and b) ensuring that invoices are paid on time. This is particularly true when credit and goodwill from both lenders and suppliers are being established but not quite there yet.

Cashflow Projection Planning.

Listed below are eight guidelines to help with building a positive cash flow situation. None are complicated, some may not apply to your business, but all make business sense and have helped many owners keep their heads above water while those around them were drowning in profit.


Step.1 Plan & Project.

Before the next accounting period, look back at previous accounting periods. Base future cash flow projections on worst-case cashflow scenarios. Look for independent advice and challenges to your thinking, for example, your accountant would be able to help.

Compare cashflow to profits generated and check if these ratios are right for your business.

Step.2 Short Term Cashflow Problems.

Be cautious. Project spending will happen faster than money coming into the business. Decide key activities every week to make sure a short term cash flow problem is avoided as financial help with solving a short term cash flow problem is hard to find.

Step.3 Customer Late Payments.

A big challenge facing new businesses is late payments. Even the best and most loyal customers pay late. Decide on the longest time you can wait for payment and make sure deadlines are honoured. Follow up in advance and even then, your cash flow projections should include late payment scenarios.

Step 4. Negotiate Your Payments.

New businesses don’t get “normal” terms of business. Two or three months’ rent upfront and suppliers looking for immediate payment is the norm. On the other side, new customers challenge profitability and cash flow as they look for discounts might expect a free-trial period or free samples.

Which is why your payments from customers and payments to suppliers are not delegated tasks. You must take ownership to find the best balance.

Cashflow projections worst-case scenarios could also tell you to take actions like increasing prices, collecting money faster, reduction in expenses, looking for an investment or taking out a loan. If any action or actions apply to your business they should be taken quickly. Waiting until the end of an accounting period is usually too late.

Step 5. Unexpected Expenses.

Your cash flow projections should include that the likelihood of an unexpected expense is close to 100%. Unexpected expenses could be caused by natural disasters, such as a flood or storm or an unforeseen incident that costs money. One should be included in cash flow projections with impact assessed.

Step 6. Higher Growth than Anticipated.

Higher growth than anticipated brings its own unique cashflow problems. It could often be looked at as either an opportunity to capture or a threat to avoid. This dilemma is because of the need to pay more cash up front now to supply products and provide services that won’t be paid for before end of the current accounting period. Acceptance of orders that can seriously impact cashflow needs careful consideration of all factors before making a commitment.

Step 7. Sales Volumes Behind Expenses.

In the early days of a new business, sales volumes can slip when needed most. A cash flow projection plan should include fewer sales volumes than anticipated caused by, for example; seasonal fluctuations, customers changing their mind or sales staff missing their sales targets. Remember the difference between objectives, i.e. what you would like to achieve, compared to targets, what must be achieved to deliver to generate profit and cash.

Step 8. The 5 Benefits of Planning Cashflow

In summary, listed below are some very good reasons why your business needs a cash flow projection plan.

  1. Your cash flow is an excellent summary of the assets and liabilities in your business.
  2. Staying on top of cash flow helps build confidence in your staff, with customers, potential investors and lenders.
  3. Short-term financing can provide access to cash flow funds.
  4. There are a number of lending options to consider. All lenders will include in their decision making how well you are managing current cash flow.
  5. When you have a cashflow projection plan that works, apply for short term financing and have it available if you need it.

The Bottom Line.

A business that looks profitable on paper may still end up in dire financial straits if it fails to maintain positive cash flow. Whether or not your business is a start-up, struggling or growing, managing cash flow effectively is key to survival. Think about the five benefits of planning cashflow and set aside some time to get started on a plan for your next accounting period.

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