A business needs cash flow in the same way a car needs oil. If there is insufficient cash flow everything slows down; if there is no cash flow, then at some point everything will abruptly freeze up.
Cash flow is necessary to cover all the overheads of the business. When this happens operations are running smoothly and the business can sell products or deliver services to create revenue.
When enough revenue flows into a business, it can produce sufficient cash flow to recycle back into the next installment of expenses. Naturally, when a business produces revenues that exceed its expenses, it’s considered a profitable business. As a result, the business can now grow by reinvesting some profits.
Stripped down to its basics, a business is a simple mechanism, but it’s not always easy to keep the inflow and outflow balanced. When expenses exceed income, then a business begins to struggle in its ability to serve its customers.
Many unexpected factors can upset the fine balance between bills paid and income earned. Expenses might rise or sales may fall, or, in worst case scenarios, both might happen at the same time.
If a business does not take immediate steps to stabilize a drop in cash flow, things can get worse. The owners may be forced to sell the business at a discounted price or go out of business altogether.
Since fixing cash flow is essential for business success, here are 3 remedial steps you can take if you have a negative cash flow situation when more money is going out than coming in:
1. Ask for financial support.
You can get financial support by asking investors to help out. In return for their cash, they would take equity in the business. While this may work out in some situations, in many circumstances the business owner has lost their autonomy to run the business the way they think fit. Depending on how much equity they gave up, they may have to confer with other stakeholders before making business decisions. This is one reason why Henry Ford had altercations with his early investors.
Another alternative is to shop for easy installment loans. These can provide just the right amount of cash infusion to jumpstart the business to give it another chance to increase revenues and move into profits. Not only is no equity is lost, but the loan can also be paid off without getting stuck in an endless cycle of extended payments.
2. Address the cause not the symptoms of poor cash flow.
Ultimately, getting financial help is a little like jumpstarting a car. It will get the car on the road again, but the sensible driver will go to a mechanic to find the cause of the problem because it might happen again.
Here are 3 common causes of sluggish cash flow:
- The business has a variable overhead spending variance. Some expenses may not be essential for the business to operate or there may be ways that your small business can save money.
- The business has an underdeveloped finance, accounting, and bookkeeping system. As a result, it is not tracking the inflow and outflow of money through the business.
- The business is not able to keep up with competitors.This might be because of disengaged workers, archaic equipment, inferior products or slow delivery of services.
The cause has to be identified. Perhaps, costs need to be cut. Perhaps, better metrics need to be adjusted to track the business. Perhaps, the business needs to increase the speed, accuracy, quality, and efficiency of its operations.
As a business owner, here are 7 questions you can discuss with your team:
- 1. Are we properly managing our funds?
- 2. Do we have clear business communications within the organization?
- 3. Are we receiving accurate information about market conditions?
- 3. Are we properly managing the distribution of goods and services to the marketplace?
- 4. Are there ineffectual areas in our supply chain management?
- 5. Do we need more working capital to handle seasonal fluctuations?
- 6. Do we offer workers adequate training to do their jobs well and provide incentives to increase productivity?
- 7. Are we using antiquated technology or archaic business processes that make us ineffectual in comparison to our competitors?
3. Review deviations from the founder’s business vision.
The problem may actually not be in the mechanics of the business but in its’ psychology, specifically the loss of vision about the purpose of the business.
It may be time for a little revision of your business philosophy.
Here are some questions to rejuvenate your sense of purpose.
1. Does the business still have a well-defined target? Perhaps, like Apple before the return of Steve Jobs, you are over-diversifying your product range and need to hone down on just a few high quality products.
2. How are we measuring our progress? What benchmarks are we reaching to grow the business?
3. What kind of corporate culture do we have now? Do people love coming to work because they enjoy intrinsic and extrinsic rewards or are employees grumbling throughout the organization how things need to be improved?
Think of a Business as A Machine
If you think of a business as a machine and cash flow as the lubricant that is necessary to run the machine, that analogy simplifies the problem and puts things in perspective. It’s now possible to think in imaginative terms of scanning the machine to identify the cash flow bottlenecks that are preventing high performance.