Cash shortages seem to just occur for business owners the way natural disasters do—with little warning and huge consequences. In truth, the vast majority of cash flow problems in businesses are a result of either a major decrease in sales or major increase in sales.
Decrease in Sales
Business owners are optimistic by nature and assume that a decrease in sales is temporary and thus they react too slowly to the decrease. Many don’t have an accurate bookkeeping system that gives them timely information about sales and don’t notice right away. They are still collecting receivables from earlier sales and payments to vendors are only being delayed a little.
The business owner must be constantly reviewing sales data and comparing it to previous months and the same months last year. As soon as they notice a drop in sales, they should immediately investigate what is going on. There are two possibilities:
- The sales drop can easily be remedied by increasing efforts to boost sales from current customers or prospects. In this case, the business owner needs to concentrate their efforts in the marketing and sales area of their business until sales are back to normal or even a little higher than normal.
- The second possibility is that there has been a permanent loss in sales. This can be a result of losing a major customer, a new competitor pushing prices down, or a change in the market that is permanently reducing your share of it (think Netflix and Blockbuster or Toys-R-Us and online toy sales). In this case the business owner must:
- increase sales by finding new niches for their current products,
- increase sales by finding new products to sell to the market, and
- cut costs to get the business back into a profitable situation. This often means letting people go. This is very hard for most business owners but is often the only solution that will save the business.
Increase in Sales
The second major cause of money problems is a rapid increase in sales. This often catches the business owner by surprise since it is logical to expect an increase in sales to result in a large increase in cash. But they often fail to consider:
- The lag between the product and payroll costs that are due now and the delay in collecting the receivables,
- The increase in overhead costs necessary to service the new customers.
To avoid the resulting cash crunch, the owner must plan to cover the shortage by either having sufficient reserves, acquiring a line of credit, or ensuring that cash collections will more closely match cash outlays. Meet with your CPA or business coach to help you draw up this plan.
At the end of the day, cash is the lifeblood of your business. You run out and you quickly can find yourself in bankruptcy court even though your financial statement still shows a book profit.
The moral of the story is to always keep your eye on the ball and watch out for sudden decrease or increases in sales. Don’t wait for the hurricane of business money problems to hit you. Be ready for them in advance.
P.S.: Go to https://profitmasters.mykajabi.com/ where I have a couple of courses that will help you avoid and alleviate cash problems.