Cash flow is the number one problem that just about every small business I meet is stressed by (closely followed by staffing issues, the ATO and government regulation).
Most small business operators spend WAY too much of their time juggling bills and cutting corners while they wait to get paid.
They’re always short of the cash they need to run their business productively – so they call their problem “cash flow”.
Many cash flow problems are SYMPTOMS
The problem that most people think that I solve is cash flow – but it’s NOT. I solve the unrecognised problem behind the cash flow problem – the lack of sufficient working capital in the business.
Solving that underlying problem for the long term frees small businesses to grow and prosper for the long term – despite what the world throws at them.
Cash flow and working capital
It’s really important to understand what cash flow is (and isn’t) – and why it becomes a major issue for so many small businesses.
Why? Because when you understand the underlying cause of your cash flow symptoms then you can fix that cause.
Cash flow shortages are a symptom – and a highly painful, stressful symptom – of a deeper business issue. They’re like the loose teeth sailors of old suffered from when they had scurvy. Scurvy can’t be solved by better dental care, because its cause is an underlying nutrition deficiency – not enough Vitamin C. (The solution is why English sailors were called “limeys”.)
Like scurvy, SME cash flow problems are caused by a deficiency – a lack of working capital. Like scurvy – when you treat the underlying deficiency then you solve a whole range of symptomatic problems.
You don’t get told much about working capital when you start a small business. You ALSO don’t get told that successfully growing your business will make your working capital and cash flow problems worse (it will).
What IS Working Capital?
Working Capital is the difference – at a given point in time – between your assets (cash receivables, WIP and inventory) and your liabilities (wages, rent, accounts payable).
Your available Working Capital is really the lifeblood of your business. It gives you the funding you need to run the business.
One of the problems small business operators consistently get into as they grow is that their working capital doesn’t grow as quickly as their business does.
As your business grows you need more working capital to feed that growth – because you’re spending more on inputs now that you won’t be paid for until later.
What are the most common Working Capital tools?
Most SMEs have at least one Working Capital tool in play – a bank loan or line of credit. Mostly these loans are secured by personal assets (banks particularly love property).
There are limitations to traditional secured business loans:
- They require large quantities of real estate security.
- You tend to get the funds in fixed lumps.
- It takes many weeks to get approval – if you get it.
- It takes large amounts of paperwork to apply.
There is a much wider tool set of Working Capital solutions available today – but most SMEs don’t even know they exist. And without an understanding of Working Capital, they can’t use them.
Understanding the basic principles of Working Capital is the first step in winning victory over your Cash Flow “problems”.
So here’s Working Capital 101
- Your business has a range of assets – including your outstanding Debtors – at any given point in time.
- Your business has a range of liabilities – including your outstanding Accounts Payable – at any given point in time.
- Your business has a variable amount of available Working Capital (the difference between your Asset and your Liabilities) that it can access to operate with at any point in time.
- The Cash Gap is the timing difference between when you pay your supplier and when your customer pays you. The cash gap can eat a big hole in your available working capital if you don’t have the financing tools to manage it.
- Liquidity is what you have when you have lots of working capital available when you need it – cash that frees you to run your business your way.
- The Cash Trap is where you get stuck if your business doesn’t have enough available working capital.
- If your business grows, then your Cash Gap also grows – well ahead of your income. You’re paying for more inputs – but the amount of time you have to wait to get paid doesn’t change. The faster you grow, the bigger your cash gap gets and the more stress it creates in your business.
- There is a growing range of well-established business financing tools that can free up working capital – but most SMEs don’t know what they are or how powerful they can be. The “top 2” are:
- Debtor (or Invoice) Finance (where you borrow based on your future invoices); and
- Trade Finance (where you borrow based on your recent purchases).
- Unsecured Loans (which let you secure your business loans with your business, not with your family home).
- When you install a sound, customised Working Capital Strategy then you can escape the Cash Trap.
Profits don’t protect you from the Cash Trap
Even highly “profitable” businesses can still operate in a stressful Cash Trap – because an annual profit is a point-in-time number that doesn’t reflect how cash flows through your business month-to-month.
Profit says nothing about either:
- The size of your month-to-month cash gap; or
- The high-stress corners you have to cut to try and survive it.
Working harder, winning more customers and making more sales could even make your Cash Gap WORSE.
Why? Because if you don’t have a Working Capital strategy in place, then as you grow you need even MORE cash to fund that growth while you wait for your invoices to be paid.
What gives SME Operators victory over the Cash Trap?
The first step in escaping the Cash Trap is understanding how Working Capital flows.
Then you can establish a sound, effective Working Capital Strategy that fits your business and industry – which is the next step towards victory over the Cash Trap.
If you’re tired of being a Cash Trap victim, then book a call with specialist Working Capital Strategist Martin Cattach to discuss your Working Capital Strategy options today.
