Entrepreneurs and managers need to have their finger on the pulse of the business and the sure sign of impending disaster is running out of cash!
Running out of cash is always a symptom of bigger problems within the business, which have to be put right.
There are early warning signs that should enable you to identify these causes and try to resolve them before it’s too late. I have outlined the main reasons and what could be done about these to stabilise the business.
1. Profitability is falling
If gross margins are falling, then eventually the business will make fewer profits and cash. There could be many reasons for this for e.g. falling sales or rising supplier costs. If supplier costs are rising, you may have to increase your prices.
If your sales are reducing, it could be a bigger worry since either you are uncompetitive or your product/service has got poorer! Having regular customer feedback should give you early warning signs to ensure the business retains its customers.
If your overhead costs are rising, it’s time to review how necessary such costs really are to the business and cut them if not required. If overhead costs such as rents are increasing, you may have to pass these on as prices increases to your customers. Or move premises if you can!
Keep monitoring your gross and net profit margins.
2. Customers take longer to pay
If your profitability is strong or rising but the business has less cash, then some of your customers are taking longer to pay and you have to tighten up credit control. All it takes is one large customer to delay payment or go bust to create a major cash flow problem.
Make sure your business is not reliant on one or two large customers but if you have to, then ensure that you have tightly controlled payment terms. One of the most common reasons for businesses to fail is a large customer failing to pay or going bust. Monitor your large customers financial health regularly by doing credit checks.
3. Staff turnover is increasing
If staff start to leave, it can be a sign of low morale and that the business is not focusing on its staff. Losing too many staff quickly can damage the business and take a long time to recover. Reputation will suffer and customers may also start to look else where.
Ensure that staff are looked after and that there are regular appraisals and feedback along with exit interviews to find out why people are leaving. Most times, money isn’t the reason for someone to leave. Staff retention is key to the success of a business.
4. No innovation
As someone once said, “there is no point in being on the right track and standing still, you’ll just get run over”. Read about how Kodak went bust by ignoring digital photography!
5. Poor cash flow management
Your business could be brilliant but if the cash flows are not managed properly the business will not grow and worse, will eventually run out of cash.
I have blogged previously about effective cash flow management and every business has to do this. Even better, hire a good part-time FD for your business to make sure it’s done.
Running and growing a business can be a rewarding experience but you still have to do the boring routine housekeeping jobs like maintaining proper accounting records, and looking at KPIs’ regularly.