Some small business problems lurk beneath the surface; others wave a red flag that’s impossible to miss. Cash flow problems can be the hardest to ignore. They feel big because they are.
But issues with cash flow aren’t insurmountable. If you're not making enough money to cover your expenses, it means something about your business needs to be fixed. In many cases, it indicates a missing or broken system. By identifying what’s causing the problem, you can begin the process of solving it.
What is cash flow?
The role cash plays in a business is to keep it running. If your business were a car, cash would be the gas. It’s the liquid money you could withdraw from the bank today if you needed it to pay bills and payroll, buy inventory and cover any other expense needed to produce the service or the product that you're selling.
Your company might have money invested in other sources—maybe you have a bulk of inventory on hand, for example. But once that money is tied up, you can’t use it for the most fundamental expenses. When there’s too much of the month left before your next cash infusion—that’s when you know you have a cash flow problem.
What are the root causes of cash flow problems?
Finding a solution for the cash flow problems in your business starts with finding the reason they’re happening in the first place. Issues with cash flow always come from one of three general causes:
- Not enough sales
- Expenses that are too high
- Not enough sales and expenses that are too high
Do you feel like you already know the general cause of your shortage? Now get more specific. If your problem is not enough sales, what amount of sales will get you where you want to be? Do you need just five more sales per month to keep your account in the black, or do you need 500 more?
If your expenses are too high, figure out precisely where. Are you spending too much on payroll because of overtime accrual, or do you have too many people on the payroll to begin with? Are you spending so much on production and storage that you can’t afford to hire the salespeople you need to move your inventory?
Get as specific as you can so you can identify the problem area that’s causing the bulk of your money shortage.
What can you do to address the root cause?
Once you know the real root of the problem, follow these steps to address it:
1. Try to quantify it
How often do you experience cash flow problems? Is there a pattern? Are there specific times of the month or year that it tends to happen? If you have no problem making payroll for the month’s first pay period, but the second is always a stress, would moving to a once-monthly paycheck be easier to manage? If you notice overtime happens the same time every month or quarter, what circumstance in the business does that align with?
2. Calculate what the problem is costing you
Let's stay with the example of payroll. If you're paying overtime, calculate just how much you’re overspending. Then figure out how much overtime you could accommodate and design a system to monitor that. Be careful not to be reactive. Laying people off or eliminating overtime altogether can end up with even more costly consequences. Fewer employees means less production—would your payroll savings ultimately cost you more in sales due to reduced output?
Whatever your root problem, quantify what it's costing you, but always think through the impact of any change you make on other areas of the business, especially as it applies to producing your product or service.
3. Change how you're thinking about the problem
If you struggle to make payroll at the end of the month, do you blame yourself for not doing enough to manage the month and sales? Do you blame your employees for not working hard enough to make goals? Do you point your finger at something or someone else?
The key to finding the solution to your problem is to start thinking about your cash flow challenge as a systems problem. Our Six Steps to Transforming Frustrations Into Solutions can help. All problems—even cash flow problems—come down to systems issues. So ask yourself what broken or missing system you could fix to help bring you more consistent and sustainable cash flow. Then get to work building it.
Solving this problem on your own can be time consuming. If you want to get to a solution faster, reach out to an EMyth Coach. We'd love to help.