When a business experiences a diminishing or unstable cash flow, it becomes vulnerable to a range of detrimental effects that can jeopardize its survival. In order to identify and resolve a cash flow problem, it is vital that leaders thoroughly examine income sources, carefully evaluate expenditures for efficiency, assess cash-handling strategies and verify the precision of financial forecasts.
Below, 14 Forbes Business Council members offer specific factors leaders can use to help diagnose and address cash flow issues as well as achieve cash flow stability in their businesses.
1. The Root Cause
A key factor is identifying the root cause. It’s crucial to conduct a thorough analysis of financial statements, including accounts receivable, accounts payable and inventory management. This helps identify any inefficiencies, delayed payments or excess inventory, enabling the development of targeted solutions to improve cash flow and overall financial health. – Lee Blakemore, Introhive
2. Cash Conversion Cycle
The cash conversion cycle (CCC), a measure of the time it takes for a company to complete the cycle of buying raw materials, converting them into finished goods, selling the goods and collecting the cash, is a vital factor to review when diagnosing a cash flow issue in a business. It provides insights into the efficiency of a company’s working capital and its ability to generate cash. – Bradley Saveth, SupplyCaddy
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3. Weekly And Monthly Updates
Using a cash dashboard is key to understanding your issues. First, project receivables out a couple of months and do the same with payables. Once that is done, add overhead outflows like payroll and rent and take a hard look at net cash by week or month. Next, adjust your vendor terms to closely mimic your client receivables so that you are limiting your cash float. Also, look at your pricing models. – Thomas Johnson, Southport Marketing, Inc.
4. The Labor Efficiency Ratio
One factor I keep my eye on is the labor efficiency ratio. We know our “sweet spot” ratio number. If the ratio is too low, we know we will be running into cash flow issues soon, if we aren’t already. It’s one simple calculation that tells you if your personnel expenses are too high for how much revenue and work you’re bringing in or vice versa. – Melanie Ammerman, VaVa Virtual Assistants
5. Past Due Invoices
Most businesses face cash flow issues because of delayed payments by customers. The essential factor to keep under close review is the status and the value of the bills past their due date for payment. Politely follow up with these customers. It is essential that customers be invoiced on time and any bills falling past due should be followed up on for payment. – Beth Worthy, GMR Transcription Services, Inc.
6. Financial Records And Trends
Data-driven insights can be used to gain key insights into cash flow issues and help develop effective solutions. A company may be able to identify potential sources of cash flow problems by examining its current financial records and trends. This could include looking at revenue and expenses, evaluating the balance sheet for liquidity ratios or assessing the company’s overall debt levels. – Neha Naik, RecruitGyan
7. The Accounts Receivable Process
When diagnosing and addressing a cash flow issue, it’s essential to review the accounts receivable process. Evaluate invoicing, collections, credit terms and customer relationships and implement cash flow forecasting. Improving this process can enhance cash flow and financial stability. – Alexander Westgarth, WineCap Ltd
8. Cash Flow Timing
The timing of cash inflows and outflows is one of the factors to be reviewed. This is because understanding when payments are due and when revenue is expected can help identify gaps in cash flow and inform strategies to improve it, such as negotiating extended payment terms or speeding up collections. – Salvador Ordorica, The Spanish Group LLC
9. Cash Flow Forecasts
Cash flow is the lifeblood of any small business, as it allows for operating smoothly on a daily basis and the ability to invest in growth. By forecasting your cash flow, you can anticipate potential shortfalls and take proactive measures to avoid them. Having a clear picture of your cash flow can help you make more informed decisions about how to allocate resources and invest in growth opportunities. – Francisco Ramirez, The ACE Group (TAG)
10. Existing Payment Policies
When addressing cash flow issues, examine payment and collection policies to avoid delayed or unpaid invoices that negatively impact cash flow. Have clear payment terms, follow up with slow-paying clients and offer discounts for early payment or automated reminders. Additionally, it’s crucial to review expenses, cut unnecessary spending and ensure responsible scaling. – Stephen Sokoler, Journey
11. Sales And Expenses Balance
A balance between sales and expenses is important. If a company has more cash in than cash out, the company will not go bankrupt. In the cash flow diagnosis, determine whether there is a balance that can secure sufficient profit at the minimum unit of products and services sales. Or, like the manufacturing industry, if they need cash out first, it is important to check the breakeven point in the business plan. – Karita Takahisa, UNIFY PLATFORM AG
12. Current Expenses
When facing a cash flow issue, one step you can take is to review your expenses. I believe you will have a better chance of solving the problem if you focus on areas where you can make changes, and the expense list is one of these areas. In essence, you should critically look at how you are spending money in the business and see if there are any unnecessary expenditures or waste. – Erik Pham, Health Canal
13. Financial Standing
Understand your cash position at any given time during the month. How are your account’s payables, receivables and payments progressing? Is there a backlog somewhere or are you ahead somewhere? What about your assets? If you need to sell something to cover a shortfall quickly, how liquid are you? Are there market-to-market losses you would need to book? Regularly meet with the finance department to discuss this. – Zain Jaffer, Zain Ventures
14. The Time Between Profit In and Payments Out
In business, much attention is paid to profit, but in reality, not paying suppliers, employees and taxes on time is a recipe for disaster for small businesses, as you might find yourself with no products to sell in no time. The solution? Instead of focusing on profits only, focus on drastically reducing the time lag between cash incoming and cost payments. – Anna Stella, BBSA
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