Understanding and Improving Cashflow in Your Business

Understanding and Improving Cashflow in Your Business

Cashflow is the lifeblood of any business. For small and medium-sized enterprises (SMEs), managing cashflow effectively can mean the difference between thriving and merely surviving. This blog outlines the five key cash principles every SME should understand, explores the seven common causes of poor cashflow, and provides practical tactics to help improve your financial health.

5 Key Cash Principles SMEs Need to Understand

1. Cash is King – Profit doesn’t equal cash. You can be profitable and still run out of cash.

2. Timing Matters – When cash comes in and goes out is just as important as how much.

3. Forecasting is Essential – A forward-looking view helps you anticipate shortfalls and plan accordingly.

4. Cashflow is a Process – It’s not a one-time fix. It requires ongoing attention and management.

5. Every Decision Impacts Cash – From pricing to payment terms, every business decision affects your cash position.

7 Causes of Poor Cashflow

1.Inadequate Accounts Receivable Process

Slow invoicing, poor follow-up, and unclear payment terms can delay cash inflows. Basically, the period time from when you complete the work, until the funds appear in your bank account is simply too long.

2.Underutilised Accounts Payable Process

Paying suppliers too early or not negotiating terms can strain your cash reserves. This is when we pay our suppliers as soon as we get the invoice, or we are only on cash terms with our suppliers.  This means that we are paying people sooner than we perhaps have to.  The reverse is true if we are experiencing cashflow issues, we might be missing out on prompt payment discounts and better terms of trade.

3.Inefficient Inventory Process

Holding too much or obsolete stock ties up cash that could be used elsewhere. Another side of this is not managing those smaller items of stock and having excess wastage.

4.Inappropriate Debt/Capital Structure

Too much short-term debt or high-interest loans can create cash pressure. Things like IRD debt or high interest debt can put significant strain on cash in a business.

5.Overheads Too High

Excessive fixed costs can drain cash, especially during slow revenue periods. Monitoring and management of the costs in the business, what are investment costs and what are dead costs?

6.Gross Profit Margins Too Low

Selling products or services at low margins leaves little room for cash accumulation.  We often hear from business owners that they cannot raise their prices, or they are too scared to, however, in times of rising costs of production you cannot afford not to.

7.Sales Levels Too Low

Insufficient sales volume means not enough cash is being generated to cover expenses. Understanding your sales drivers and breakeven point can help you create clarity around the sales required to succeed.

Tactics to Improve Cashflow

Below we outline 1-2 tactics that you could use to immediately improve the cashflow position of your business.

Inadequate Accounts Receivable Process

Underutilised Accounts Payable Process

- Negotiate longer payment terms with suppliers.

- Schedule payments strategically to align with cash inflows.

Inefficient Inventory Process

- Implement just-in-time (JIT) inventory practices.

- Regularly review and clear obsolete or slow-moving stock.

Inappropriate Debt/Capital Structure

- Refinance high-interest debt into longer-term, lower-rate options.

- Balance short-term and long-term financing to match cash needs.

Overheads Too High

- Conduct a cost audit to identify and reduce unnecessary expenses.

- Outsource non-core functions to reduce fixed costs.

Gross Profit Margins Too Low

- Review pricing strategy and increase prices where justified.

- Negotiate better supplier rates or reduce production costs.

Sales Levels Too Low

- Invest in targeted marketing and sales training.

- Diversify product/service offerings to reach new markets.

Take Action to Improve Your Cashflow

Understanding and addressing the causes of poor cashflow is critical for the success of your business. Implementing the right tactics can lead to stronger financial health and greater resilience.  

If you're ready to take control of your cashflow, consider undertaking a structured cashflow improvement program and reach out to us for expert guidance and support.

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