How is your business coping with rising costs?

If you are aware of what may lie ahead, you can anticipate and avoid problems.

Every business has different challenges, but there are many familiar scenarios. These include:

• Initial underfunding - this is a common problem often due to underestimating the cash needed.
• Insufficient sales and/or inadequate profit margins - essentially, if you don't sell enough products with the right profit margin, your business won’t be able to pay its way.
• Rapid but poorly planned growth - sudden expansion may need investment long before the expected revenues come in.
• Too much money tied up - funds invested in non-liquid assets, such as stock or machinery, may leave you short of cash.
• Late payments - poor invoicing and debt-chasing processes can prove costly.

The common factor is a shortage of available cash. These cash flow problems can even affect businesses that are doing well by other measures, such as sales and margins. Lack of cash flow is the number one business challenge.

To stay afloat, the money coming into a business every month, plus any reserves and loan facilities, must at least match your outgoings.

Make forecasts for the months ahead and look at sales and expected cash flow. If they begin to fall below forecasts, you should take immediate action.

Regularly ask yourself the following questions:

• Are sales falling?
• Are you losing market share?
• Is your reputation suffering compared to your competitors?
• Do you need to borrow to cover operational costs (rather than to invest)?
• Is it becoming increasingly difficult to pay creditors?
  

If the warning signs are there, you should think about taking action quickly. Initially, problems may not seem that serious. Sales may be slightly down or the cash coming into the business may not quite meet the outgoings.

The business carries on as normal in the hope that next month’s cash flow and sales figures will improve. But if the figures don’t improve, the business could find itself inundated with demands from suppliers and it may be difficult to pay staff.

The key is to be proactive with measures that will put your business back on track.

What actions can I take?

By spotting the early warning signs, you will be in a strong position to put things right.

For instance, if your cash flow difficulties are related to sales figures, your first step could be to trade your way out of the problem. If you have the resources, you could step up your sales and marketing. Consider selling more to existing customers and tap into new markets.

If the time-delay between the raising of an invoice and the customer paying is causing cash flow problems, there may be several possible solutions. These could include:

• Focusing on winning business that will generate cash quickly
• Tightening credit control. Ensure invoices are sent out on time and chase overdue payments
• Consider invoice discounting arrangements, where cash is lent to you by the bank as soon as an invoice is raised
• Keeping track of the financial health of your customers and suppliers
• Changing payment periods

If there’s no real chance of sales improving, you may want to look into other measures to free up cash. You could consider selling assets, reducing costs and/or inventory.