23 June 2023

How do you know if you have a Cash Flow Problem?

Author: Zsolt Bircsak, Capitalise Business Finance

It is common knowledge that poor cash flow is the biggest threat to, and greatest cause of, business failure for SME’s in Australia. Yet it can be difficult to identify if your business suffers from a cash flow problem – when your cash balance is low it always seems like you just need more cash, but how that cash is generated is key to success and growth – loans aren’t always the best solution. It can be even more difficult to identify which finance solutions would actually solve a cash flow problem (rather than just hide it for a short time) since many financiers will use the term “cash flow” in their advertising to attract clients, but offer finance that has nothing to do with cash flow.

Cash flow, in simple terms, is the flow of money coming into, and out of, a business. When money is flowing in regularly, the business has the funds available to make creditor payments for things such as stock, supplies, wages, rent, taxes, loan repayments, etc. The more frequently cash flows into a business the better the ability to pay creditors, meaning that more profits can be generated in a shorter period of time through faster turnaround of products or services. When the flow of cash into a business is slow, creditor payments are delayed, resulting in less turnover of products or services, and hence less profits over time.

The ideal balance of cash flow is when incoming cash is received in time to allow creditor payments without delay, resulting in uninterrupted business and continuous product or service delivery. When you have achieved this balance your business is generating maximum revenue as quickly as possible, resulting in the ability to seize growth opportunities.

How do you identify if your business is suffering from a cash flow problem and losing profit opportunities? You need only ask the following questions:

“Do my customers pay me on extended credit terms” (i.e. you have to wait some time for payment for your goods or services)?
“Am I waiting for my customers to pay me before I can pay my creditors and start my next production run/service delivery” (i.e. is production slow because you don’t have the funds to pay creditors)?

If you answered “yes and yes”, then your business has a cash flow problem.

There are two elements here that determine your business cash flows – how quickly you receive income, and how slowly you pay creditors. The faster you receive income and the slower you pay creditors, the better you are able to manage cash flows and grow your business. It’s poor business sense to hassle customers for early payment, and even worse business sense to delay paying your suppliers (they may decide to not supply you at all), so how can you manage your business cash flows without any impact on your customers or creditors? The answer is “with flexible finance solutions that allow you to control when income is received and creditor payments are made, on your terms”.

What does that look like? From the receivables perspective, it’s the ability to turn outstanding invoices into cash whenever you need to, and however much you need to, without being forced to finance more or less than needed, and without being forced to finance at a time that doesn’t suit you. And from a payables perspective it’s the ability to make payments for creditor invoices at a time that suits you, while your creditors are guaranteed to be paid on time every time. In both directions, flexibility is the key to maximising profits while minimising costs.

What is flexibility? It’s not being locked in to a contract, it’s the ability to start and stop the finance as needed, and it’s the ability to manage how much is financed (and hence the cost of finance) at any time.

When it comes to finding the right solution for your business, it can be difficult to spot a real cash flow solutions vs something completely different with poor advertising. For example, a commercial lease bond guarantor advertises their product as a “cash flow hack” and quoted an “unnamed CFO” as saying that their product is “probably the easiest way to improve your cash flow”. The product does nothing to change the receivables or payables days. Be aware that many financiers will use the term “cash flow hack/finance/solution/etc” to get attention, then sell you something that simply won’t work.

So how do you know if a finance product offers a real cash flow solution? There are only two questions that you need to ask when determining if what you are being sold is a cash flow solution or not:

Does this give me the ability to manage, on my terms, when I get paid, at any time I need, for any amount I need?
Does this give me the ability to manage, on my terms, when I pay my creditor invoices?

If you answered “yes” to either of the above questions, then the product is a real cash flow solution.

It is evident that a simple injection of cash into a business isn’t a cash flow solution – it may mask the problems caused by poor cash flow, but it won’t solve the cash flow problem. Cash injections (e.g. business loans) do not give you the ability to control your income and expenses timing – they aren’t a solution to cash flow problems. In fact, loans can result in making a cash flow problem even worse – they add extra demands on outgoings by adding fixed and inflexible repayments that don’t allow for a businesses cash position nor when income is received or other creditor payments need to be made. 

By remembering to ask yourself the questions posed above you will be able to identify if your business has a cash flow problem, and be able to find a finance product that provides a real cash flow solution.

Capitalise Business Finance specialises in providing real cash flow solutions with both receivables and payables finance products. Our facilities provide our clients with maximum flexibility, allowing them to manage, on their terms, their cash flows to promote growth and minimise finance costs.

Please feel free to contact us at any time to discuss your situation and whether we could help you achieve your business cash flow goals.