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Cash flow problem

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It has been said that there are three important things in business – cash-flow, cash-flow and cash-flow. Cash-flow is a common problem in small businesses, especially startups and fast growing companies.


[edit] Common causes & best practices for cash flow problems

  • Excessive accounts receivable
  1. best practice – Publish and review an aged accounts receivable report by customer weekly by relevant management, including the CEO and prepare and executa an action list from the review.
  2. Best practice – Analyze the actual time it takes for your organization to bill customers and determine if this process can be expedited. Faster billing of customers will expedite payments. Customers will not pay for a product or service until they have to. If they do not receive the invoice timely this provides a ready excuse for delayed payment.
  3. best practice – convert slow pay customers to cash on delivery (c.o.d.) terms
  4. best practice - establish the optimum aged receivables as a guideline to be monitored. For example, a business may run 60% 0-30 day; 30% 31-60 days and 10% over 60 days. When a receivables report deviates from this historical optimum ratio, its time to analyze, ask questions and take action.
  • Excessive inventory
  1. best practice – do a physical inventory each month to ensure the inventory is accurate
  2. best practice – move good to customers faster. Examine the full cycle and all elements of the process – sales, production, shipping to invoicing.
  • Bad debt & slow paying customers
  1. best practice – frequent aged accounts receivables reports and review prevents an old receivable from turning into a bad debt (customer is going out of business)
  2. best practice - establish a written credit policy so all employees and divisions are on the same page
  3. best practice – credit checks before doing business with a new customer
  4. best practice – gradually extend credit terms to new customers to ensure promises are being kept
  5. best practice - use a credit service to help analyze customer risk; there are many specialized credit services that fit different industries
  • Weak gross margins - If gross margins are weak, the more sales will worsen cash flow.
  1. best practice – analyze and report gross margin by customer; by product or service line to ensure gross margin is understood at a detail level in the company.
  2. best practice - raise prices commensurate with costs - companies many times falsely assume they will loose customers and sales if they raise prices.

[edit] Other best practices to improve cash flow

  • Negotiate with suppliers for extended payment terms
  • Deposit checks every day
  • Prepare one page daily cash report that shows inflows, outflows, bank balances, credit line and other key cash flow numbers. The CEO and other key managers should see this report daily to facilitate cash flow awareness, planning and integration to daily decisions.
  • Keep accounts payables posting up to date. This ensures that outgoing cash needs are understood and able to be predicted.
  • Analyze discounts and penalties of suppliers and vendors and establish a policy on how the company will manage these options.

[edit] Resources

There are many other strategies to improve cash flow. Some are specific to the type of business or industry. More sophisticated cash management practices become appropriate as organizations get larger.

[edit] Author

The author of this article is Terry Gardiner.

Terry Gardiner is the founder and President of Silver Lining Seafoods and NorQuest Seafoods - a medium size Alaska seafood processing companies; and currently Board member of the Anvil Corporation, an employee owned company specializing in oil and gas engineering.

His co-operative experiences include member director of the Commercial Fishermen Co-operative association; creation of legislation for the Alaska Commercial Fishing and Agriculture Bank; and advisor to the US Dept of Health and Social Services for the state Health CO-OPs.

Terry served ten years as a member of the Alaska House of Representatives -several legislative committee chairmanships, Speaker of the House, Chairman of the Alaska Criminal Code Commission and board member on various state and federal boards and commissions.

His non-profit experiences include National Policy Director for the Small Business Majority in Washington DC; working with the Herndon Alliance and ForTerra.

Terry authored the leadership book, "Six-Word Lessons to Build Effective Leaders: 100 Lessons to Equip Your People to Create Winning Organizations".

Best practices to avoid cash flow problems and best practices to optimize positive cash flow for businesses and non-profits.

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