Is Inconsistent Cash Flow A Barrier To Growth?
For any business, steady and predictable access to cash is vital. In this four-part guide, we will provide you with important tips and techniques for overcoming your cash flow challenges in order to help drive growth.
When cash is flowing, a business has a positive pool of working capital to fund its operations. Improving cash flow increases the working capital available, and the ability to meet financial commitments as they fall due.
With recent times being challenging due to the COVID-19 pandemic, many businesses have seen a large downturn resulting in little to no sales, diminishing available working capital and straining cash flow, leaving businesses in a tight spot.
On the other hand, some industries (such as ecommerce) have seen a surge in demand this year, and rapid sales growth can also impact cash flow. While increasing demand would normally be welcome, when it comes suddenly it can expose a business to the risk of overtrading. As businesses experience rapid growth, they may also seek more staff to keep up with demand and this investment requires additional working capital.
If your business has experienced cash flow issues recently, you’re certainly not alone. In fact, most SMEs have been grappling with cash flow issues.
Here are some of the top issues identified by business owners and directors
| CAUSE | EFFECT |
| Suppliers reducing payment time
When a supplier insists on reduced payment terms, it can have a major impact on your cash reserves; particularly if you need the supplier’s delivery in order to generate future income. |
Unable to take on new work
Depending on the nature of your business, a lack of cash flow can also impede your ability to take on new work. Fulfilling orders requires working capital to pay for wages and all the other costs of running your business. |
| Bad debts
If a customer fails to pay you on time, or even at all, it can have a major flow-on effect. When an account isn’t paid, you’re not only missing out on anticipated revenue, but you’ve already worn the cost of the time, wages, and other expenses invested in the work you’ve completed. |
Inventory management
Significant amounts of cash can be locked up in unsold inventories. As difficult as it can be to accurately forecast demand, it’s also important not to lock away your assets by overstocking. |
| Customers paying late
Not getting paid on time can be very damaging to any business. It can seriously affect your ability to meet your own expenses and maintain your working capital. |
Difficulty meeting tax payments
Typically, your tax obligations can be the first to be stretched when your cash flow is tight. Businesses have had some relief from these obligations with the COVID-19 incentives that have been offered, however at some stage the ATO will be looking to be paid the tax debts which are due. |
In part 2 of this series, we will look at Tips For Overcoming Common Cash Flow Hurdles.
You can Download our Cashflow Guide here
Feel free to contact us for anything that relates to your business finances so we can help with your success.
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Habib Bulut |
4 Pickett Drive , Altona North, VIC 3025
