The problems that arise in cash-poor companies
Poor cash flow can affect much more than the financial performance of your business.
A company may have all the revenue in the world, but without the ability to generate cash, it can easily fail; and in times of crisis, holding cash gives business owners and investors more options, and in times of economic uncertainty having this flexibility is crucial.
Increased Interest and Bank Charges
When having to source funding externally from lending institutions or private investors, you’re immediately incurring extra costs which will affect your profit and cash flow; and bank fees and interest can accumulate very quickly if you go outside your credit terms.
Poor cash flow may lead to you having to pass up on great opportunities to grow your business. For example, you may not be able to invest in the machine that will make production more efficient or will have to pass on a marketing opportunity because of insufficient funds to support the campaign.
Poor Relationships with Suppliers
Being constantly late with payments to your suppliers may cause tension in your relationship with them and missing out on favourable payment terms and discounts.
Limits Ability to Grow
Your business cannot grow if you don’t have the resources to assist that growth. The business will enter a restrictive loop if there’s no point increasing sales if you don’t have the capacity to fulfil the extra orders.
Fear Creeps in and Constrains Creativity and Morale
The culture of the business stems from the management team. If managers are stressed and worried this will reflect in the staff morale, especially if they are worried about their long term future.
A third of company owners completely lose motivation to continue running their business due to stress, and financial worries are often cited as the top stressors. It steals your focus. It diminishes your energy. It robs you of balance in your life.
Hard to Weather External Forces
Your business doesn’t operate in a vacuum and changes within the external environment are businesses risks or opportunities that can’t be ignored. Long-term survival is only possible if your business has the means to adapt to external forces such as economic events, changes in material costs, labour costs and consumer demand. Theses external factors directly influence market optimism and consequently consumer willingness to spend money which ultimately impacts your bottom line. Businesses with poor cash flow can be crippled very quickly by even the slightest change in macro environmental factors, and the extreme cost of lack of cash flow is that you go out of business.
The Cash Advantage
Your business must have cash on hand for various reasons, such as investing in new infrastructure and dealing with unexpected expenses. Moreover, a business’s cash flow is often cited as a key factor in its potential for growth and long-term success. Equally, poor cash management practice leading to inadequate cash reserves (or “running out of money”) is typically the number one reason why businesses go bankrupt.
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Selina Bolton is a business strategist and the founder of Seed.Partners; a mergers & acquisitions firm specialising in attracting investment and creating opportunities for small to medium-sized businesses to scale and build value at pace.
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