Sometime back in one of my posts on cash flows, I briefly mentioned situations that may make an enterprise experience persistent cash flow problems. Today I would like to elaborate a bit more on these situations. Yes – there are entrepreneurs whose businesses have cash flow problems year in and year out, yet they have little clue on what might be the problem. Are you one of those? If such problems are coupled with lack of good record keeping hence no good financial reports, together with poor understanding of the financial reports, such challenges may last forever or even cripple the business. Moreover, some entrepreneurs are reluctant to use external experts that might decode the problem and help implement solutions.
I trust you know that the business you are running is geared at making profits. Isn’t it Mr. Entrepreneur? If you don’t run that enterprise profitably and sustainably you will certainly not proceed far. Will you? As I mentioned earlier, cash flow challenges bring business to their knees faster than loss making – though the two are related. I would therefore like to explain briefly situations that you need to watch as an entrepreneur, if you experience persistent cash flow problems. Taking early care of these actually help avoid cash flow problems, and help promote business sustainability. Let’s consider the below.
- Loss making situations could lead to persistent cash flow challenges. But what is a loss? In a very simple way, when the enterprise’ expenses both fixed and variable exceed the incomes or revenues for a given period, the enterprise incurs a loss. When the reverse occurs you have a profit. Now, the loss incurred comprises the cash element and the non-cash element. Non-cash costs may consist of depreciation (wear and tear) of fixed assets as this is recognized for accounting purpose but does not involve cash outflow. Possibly some provisions also do not involve cash outflow. You need to know these things as an entrepreneur, don’t you? When you lose real cash (excluding the non-cash loss) then you need to very urgently take action to stem this loss because this translates directly into cash flow problems for as long as you continue operating and making such losses. Loss making in itself has countless causes but I will talk about this another time.
- High indebtedness is another factor that can lead to persistent cash flow problems for an enterprise. Depending on the nature and type of liabilities including the amounts and terms involved, the impact on cash flow of servicing debts whether short-term or long-term cannot be taken lightly. I know some of us entrepreneurs like borrowing and owing just for the sake. Do you agree with me? There are those who take too seriously marketing gimmicks of bankers to come and borrow, even when they don’t have any serious plans for the money. Of course bankers survive on lending. This is reality. But there are also those who genuinely borrow to invest, and then overtime repaying the loan becomes challenging hence persistent cash flow challenges. Such situations require good handling to minimize the negative impact on cash flow.
- Misdirecting cash resources of the enterprise is another culprit. Some people today have the idea that entrepreneurs are folks that are very stubborn, and hardly take advice. Could be, could be not. When the stubbornness leads to misallocation of resources over long time periods however, then persistent cash flow problems might exist. Take it this way – you have funds for procuring materials but you decide to buy machines; or you have money for maintaining production machines but you decide to put in into a fixed deposit account hence locked for some months; or you just decide to draw the funds for your personal plans such as buying a house. Now, being the owner of the enterprise does not entitle you to mediocre financial management. Period. You might not like this but it’s the reality. You can only misdirect resources at your own peril.
- Lack of budgetary discipline or poor budgetary control, also including unplanned cash withdrawals by the business owners. You might do wonderful cash flow budgeting or planning, but your own indiscipline makes you spend otherwise and get challenges. This might involve unplanned withdrawal of significant amounts from the business for whatever reasons. Haven’t you seen such in action in some enterprises?
- Poor credit control is another problem that may lead to persistent cash flow problems. You certainly incur costs in producing and delivering value in products or services. When you don’t recoup such costs promptly you are headed for cash flow problems. Isn’t this very straightforward Mr. Entrepreneur? No need for more elaboration I think. The inflows might be over-delayed yet you need to continue spending, or they simply could be lost altogether. How are you going to bridge that funding gap?
I could expound more but let’s stop here for today. By the way, the first item of loss making above has a lot more, and I think I will treat this on its own in another blog. I think it’s advisable to decode it so that entrepreneurs who have limited knowledge can check areas where they need to take action for the sake of their enterprises. When you read statistics of the rate of business failures today you get concerned whether many entrepreneurs out there know what they are doing. It’s good to share knowledge as learning is a lifetime event. Don’t you agree with me?
The Wise Entrepreneur