Why am I making sales, but have no cash flow!


Why am I making sales, but have no cash flow!

We’ve all heard the expression “cash is king“.

In business, this refers to ensuring that money flowing in must always exceed money flowing out.  Given the recent issues with COVID, most SMEs are experiencing extremely problematic cash flow.  Many have already used up their cash reserves and are experiencing difficulty meeting their liabilities.

It is important for business owners to dig deep and understand the reasons why they are experiencing cash flow problems so that they can address them correctly before it severely and fatally affects the business.

What are some of the causes of cash flow issues? 

There can actually be several issues that may be resulting in poor cash flow.  The biggest mistake SMEs make is not assessing what is really causing the issue.

These are some of the factors that can contribute to poor cash flow:

  • Poor margins;
  • Poor customer collection processes;
  • Poor credit issues resulting in adverse payment terms to creditors;
  • and an undercapitalised business.

Unless all of these possible causes are analysed and considered, you will not be able to find a solution that will work in the long term.

Examples of some solutions that help alleviate cash flow issues: 

Low-profit margin: if profit margins are low (high volume/low margin sales), then it will be more difficult to finance your way out of such a cash flow issue.

We had a labour hire business, competing in a very competitive marketplace.  They factored their sales, the money came in quickly but went out even quicker.  The margins were well below 10% and after accounting for credits, bad debts, overheads and financing costs, it became clear that the more this business sold, the higher its outstanding creditors became.  Their problem was not cash flow, but rather a flawed model given their structure.  Their margins were not sufficient to cover all of the costs.

The choices were to either properly capitalise the business and to increase margin, or to reduce costs significantly.  In a competitive marketplace increasing margin was not readily possible.  When it came down to it, the shareholders did not have equity to put in and given the low return for risk, they did not think it was a worthwhile investment anyway.

Poor customer collection processes:   this is when you have a company that sells well but does not collect well.  In such an instance, factoring debtors could help.  However, the fundamentals still have to be right.  Financing is a tool, not a solution.

A poor collections process increases costs and adversely impacts cash flow.  It is not always possible to increase collection times, but if you can increase the margin slightly and offer a small discount for early payment, you may see benefits.  You need to consider all the levers you can pull in situations such as this.

Poor collection coupled with tightened credit squeezes an SME from both sides.

Poor credit issues: it is often difficult to get extended credit, so when your collections are taking 90 days and you are paying your creditors in 30 days, there is a “funding gap”.

This gap can be addressed by equity or finance.  However, as the business grows this becomes increasingly difficult.

A well-managed business will work on reducing this gap as much as possible.  Some businesses and industries have difficulty reducing this gap e.g. professional services.  It then becomes an exercise of managing costs, margins and better-paying clients, so that cash can continue to flow.

4 tips on how to unlock cash in your business: 

  1. Slow or old moving stock: have a “clearance sale”
    The objective is to remove stock that not only ties up cash, but costs you money in storage etc.   This involves analysing performance, profit and demand for each stock item.
  2. Overstocked items: needs a “discount sale”.
    It is important to identify the ideal level of stock that covers the demand in a particular period of time.  Any excess should be discounted and sold.  The amount that you discount the excess stock will depend on how much there is and how quickly you need to move the stock.
  3. Plant and equipment surplus: – organise to auction any assets that are no longer useful or needed, particularly if they have been fully depreciated. As well as unlocking cash, it frees up space and can reduce maintenance costs.
  4. Debtors over 30 days:  providing a discount for early payment can benefit both parties.  Customers are rewarded for paying early and suppliers get paid sooner which improves output and ultimately cash flow.  It is typically calculated as a percentage and should be shown on invoices.

In summary, working capital funding or cash flow is the most important lever in an SME.  Business owners need to understand what drives outcomes and how to best manage these for the business to survive.

For your business to survive you need to ensure the cash is on hand!

Should you wish to discuss how to improve your cash flow or business in general, please contact Riad Tayeh on 02 9633 3333 or mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business strategy, turnaround, forensic investigations, and insolvency (both corporate and personal).