Poor cash flow is a critical concept that many entrepreneurs don’t fully understand. I believe this is because they usually hear about it from accountants who try to explain it in accounting terms. Poor cash flow is an operational issue. Most poor cash flow problems are caused by one or more of five things:
- Collections are too slow
- Operation capacity is too high or too low
- Not enough sales
- Your price is too high or low
- You don’t have enough leads
Let’s take a little closer look at each of these cash flow problems.
Collections are too slow
This is a pretty simple cash flow problem to find. If you don’t get the cash for your product or service in a timely manner then you can’t pay your bills; have to finance your credit; and it costs you more to do business. If you get caught in this cycle too long it’ll put you out of business altogether.
This is usually where the accountants get involved and tell you “you need to watch your accounts receivable (A/R) and how you spend your money” and all that good stuff. But, even if you collect upfront or don’t have A/R problems you can still have cash flow issues. The remaining four problems show you how cash flow is more than just a collection problem.
Operation capacity is too high or too low
If you have too much capacity, then you are spending money on resources that could be spent on something else. Thus you have an expense issue and don’t have the “cash on hand” to pay for the things you really need to be spending like marketing and sales.
If you don’t have enough capacity then production is slowing down the revenue flow. If your revenue is not flowing then you’ll have poor cash flow.
So, how much capacity should you have? That depends on a few things. First, are you growing, shrinking, or just trying to maintain your current revenue levels? If you’re growing, then how fast are you growing? If the market is down or you are just trying to maintain that is a different story, but I would say stay between 50%-80% of your capacity. On the low end look at cutting back and on the high end make sure you have the capital to add more capacity or you should create a game plan for how you will raise the needed capital to expand.
Not enough sales
Many entrepreneurs think you need to close 100% of the deals you get or something’s wrong. In fact, most sales professionals will tell you a 20%-40% close rate is pretty good. If you are outside of this range your close percentage is telling you something.
If your close percentage is higher than 40% then your price is probably too low. I speak more about this in the next section.
If your close percentage is lower than 20%, there are a number of things that can cause this situation, such as:
- Pricing too high
- Leads are not well qualified
- Sales reps need training
Unqualified leads can be a killer of time for sales reps by spending time qualifying when they should be selling. This problem has its root cause in marketing. It means you are talking to the wrong prospects or are using the wrong message to get people to call you.
If you have a mix of people that can close the leads in the acceptable range, but others that cannot, this would indicate a sales training problem. Sales reps that don’t hit the mark need to be evaluated to determine if they understand your products and services or have the talent necessary to sell.
Your price is too high or low
Pricing is another area where entrepreneurs frequently struggle. If your price is too high then not enough customers will buy. But, what if the price is too low? Now the problem becomes you can’t afford to deliver or you aren’t making the profit that you need to make for the business.
You don’t have enough leads
At the beginning of the revenue cycle is marketing. Marketing is a big problem for many small businesses. I believe the reason is because many small business owners don’t understand the real purpose of marketing – to generate leads for sales to close! There are countless ways to market a business especially with all of the new social media tools, but this can be confusing.
For the Business Observer Article: http://www.businessobserverfl.com/section/detail/five-things-that-cause-poor-cash-flow/