Why Profitable Businesses Are More Likely to Be Hurt by Cash Flow Problems

profitable business

Are you a small business owner struggling to pay your bills? You may think you have a cash flow problem. But then again, you may not. Perhaps you’re just not making enough money in the first place.

But is that really a cash flow problem? It’s probably more accurate to say that you have a profitability issue and are losing money as a result. At this point, no amount of cash flow mitigation methods can help you out. You’d be better served looking at your business model, COGS, pricing, etc.

The truth is, real cash flow problems are actually more likely to strike profitable businesses. How can that be? Well, the cash was there, but it frequently gets taken away by some common suspects – buying inventory or new equipment, dealing with unexpected outgoings, and so on.

So, while your books may show that your business is a profitable one, the cash has gone, and the threat of going out of business is a very real one.

That’s the fundamental definition of a cash flow problem.

So what can you do about it? Assuming your business is profitable, here are a collection of tips for dealing with a true cash flow problem, before it gets too late:

Project Your Cash Flow
This is accounting 101. Whether you’re a freelancer or a fully-staffed small business, you have to know when money is coming in, when it goes out, and what you are left with at the end of each month so that you can predict patterns, and come up with a plan to handle any bumps in the road. Read my tips for creating and using a cash flow forecast.

Keep an Eye on the Cash That’s Already Come In
Now that you’ve used your cash flow forecast to gauge your cash situation for the next few months, it’s time to look at your current cash situation – what’s already come in and what’s gone out. This is an important exercise that will help you understand how much cash the business has on hand (something your P&L statement won’t tell you) and if your business is consistently generating more cash than it spends.

Control and Manage When Cash Comes and Goes
The key to shoring up cash is managing how it comes into and exits your business and controlling that flow as much as possible. Your business needs enough cash coming in to cover your costs, but you also need to control how and when that cash goes out again so that you’re not left in a cash flow negative situation.

The first place to start is to organize and oversee your accounts receivable and payable. Diligently invoice early and collect payments often. Reduce and shift inventory (that’s all cash tied up right there) and look for ways to improve your cash conversion cycle.

Have a Cash Reserve
Don’t leave it too late. All businesses need cash in reserve to tide them over during a seasonal low or help deal with the unexpected (investing for unforeseen growth or even an illness that incapacitates you). Make sure you have a financial cushion or credit options before you run out of cash. What you’ll need depends on your type of business. A consultant or solopreneur may be okay with a few months of savings in the bank while a larger supplies-driven business will need a business line of credit or business credit card.

The Bottom Line
Ensuring you have as much cash available as possible and monitoring the timing of how it flows in and out of your business like a hawk, is key to staying afloat, no matter what life throws at you.

For more cash flow management tips, check out these blog posts:

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Tags: Financing