Causes of Cash Flow Stress

by Kate on October 9, 2011

Cash flow challenges aheadRegardless of what you think about the likelihood of economic meltdown, if you own, manage or are responsible for results in an organisation you’d be bonkers not to consider what the current turmoil means for that business.

Cash flow is one area that deserves attention. Cash is notoriously tight between January and March and it’s likely that many businesses will face greater than usual challenges in the months ahead.

To reduce financial stress in the new year, businesses need to go deeper than chasing debts and look to the root causes of cash flow challenges.

 

What will affect cash flow in the months ahead?

In months ahead, cash flow will likely be affected by many external factors. Here’s what’s going on out there:

  • Low profits, especially in smaller business. According to the Reserve Bank 40% of firms with assets under $1m reported losses in 2010 and 2011.
  • Larger corporates trimming costs as they anticipate slow growth and constrained profit.
  • Some business and consumers feeling nervous and holding back on spending.
  • Business failure at higher levels than in the recent past.
  • For growing business the challenge of funding and supplying extra demand.
  • People may be feeling anxious and uncertain and that is likely to have an effect on how they work.

So, even if business is doing OK now, these factors are worth a moment’s thought. For example, what if a major customer or supplier becomes insolvent, a deal takes longer than usual to come through, or customers pay just that little bit later.

The usual approach isn’t enough

Round about this time of year, accountants are prone to warning of cash flow crunch ahead and provide advice on how to get through it. Given all that’s going on, greater than usual attention to cash flow is merited (and to a bunch of other areas, but one topic at a time!).

Not that there’s anything wrong with the usual advice. These are good reminders and if you’ve neglected the basics you should pay attention. Still, the ‘usual’ list has become so commonplace I wonder if anyone really hears it.

Anyway, it goes something like this:

  • Collect debts
  • Control inventory
  • Manage (stretch?) creditor payments (where possible, within terms)
  • Bring in sales (though this can make cash flow worse, so there’s always a discussion to be had on this point)

Action in these areas puts needed cash in the bank, but many businesses still lurch from cash abundance to shortage in Q1. Cash flow difficulties lead to pressure to make sales (often regardless of profit), slash staff costs and overheads and defer important projects. Ironically, this can lead to poor service and operations problems which just make the situation worse.

It’s important to look underneath the surface and do more than seek band-aid solutions.

7 causes of cash flow stress

To improve cash flow, we need to take a look below the surface at causes of cash flow stress. Here are some of them:

  1. Low, erratic or unpredictable profit
  2. Long marketing, sales and production cycles that tie up cash
  3. Failure to recognise, manage and reduce the impact of seasonality in revenue and costs
  4. Inadequate financial information and cash flow plans
  5. Inadequate cash buffer
  6. Inadequate systems for invoicing and accounts receivable collections
  7. Lack of understanding of cash flow by sales and operations staff, leading to lack of proactivity in influencing cash in their areas of concern
The good news is that planning and positive action makes a difference. A systematic look at each of these will reveal the areas for action.
Which of them should you be paying attention to? What will you do about it?

 

 

 

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