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How cash flow can cripple your business

Negative business growth and the onset of financial distress often catch business owners and managers off guard. The problem, more often than not, lurks in financial statements and cash flow forecasts. These, if not managed properly, can cripple a business.

The signs of financial distress usually become clearly noticeable when an organisation has already passed the threshold into distress. However, most symptoms and causes are hidden in plain sight, and the result can be fatal.

Cash flow is King!

A company policy of having strict creditor (and debtor) days where suppliers and service providers are paid as per agreement means that the company is inhaling and exhaling normally, to use an anatomical analogy. Laboured or erratic “breathing” means that the company is struggling to get money in, thus making it incapable of spending money.

Cash flow is one of the most important factors of a company in financial distress. Continuing with the medical analogy; the first step would be to “check the airway”. This means that the EMT must establish if there is an obstruction blocking the flow of air into the lungs. The same applies to a distressed company; the restructuring consultant needs to establish that there is sufficient cash flow entering the business.

The famous saying “cash is king” should actually read “cash flow is king”, as it is imperative for an organisation in distress to circulate cash. According to a US Bank study, 82% of businesses fail due to poor cash flow management. A deficit in cash flow means that the business cannot sustain itself and the other critical functions. The entire company depends on cash flow to survive. It is a wasted endeavor to attempt to tweak or restructure a business without a healthy cash flow basis.

Managers and board members need to stay abreast of cash flow projections and respond quickly if any fluctuations are noticeable.

 

The bicycle analogy

Well inflated tires can keep a bicycle steady and moving forward without difficulty. The turning wheels represent the cash flowing through the business. For example:

As soon as air starts to leak from a tire it will slow down, causing it to lose stability and momentum. The bicycle will ultimately fall over. Similarly, a business will lose its stability and momentum due to poor cash flow, and ultimately fail.

The cash leaks from a business through non-profitable operational units, bloated overhead costs, interest cost, loan capital down payments for unproductive assets and excessive drawing by the owners, to mention a few. The more time it takes to turn stock into cash the longer it will take to collect debtors’ payments.

In conclusion

Cash flow is key to managing and growing a successful business. Don’t wait until your business is in financial distress or “breathing” erratically before reaching out for help.