Cash is King

What do all failed businesses have in common? They ran out of cash, simple as that.

Cash flow problems can lead to a negative spiral that ends in business failure, for the following simple reason; you cannot afford to increase your sales, because you don't have the cash to pay for the materials and payroll and marketing, but without increasing sales, you cannot make the profits that generate the cash needed to get out of the cash flow problem.

Many businesses get into cash flow difficulties by over-trading, this is especially common coming out of recession, when orders suddenly pick up, and the cost of completing the orders drains the business of cash, leading to a cash flow crisis that can prove terminal. The time when orders pick up is the hour of maximum danger.

The Solution

Whatever the cause, the solution is generally not ignore the problem and hope things improve. Management need to deal with the cash flow problem aggressively to achieve a permanent solution.

Take decisive action

This will involve a combination of the following actions:

• raise cash from asset disposals/sale leaseback
• raise cash from asset finance or equity investment
• release money from your ledger by invoice discount & factoring
• cut overheads and seek improved terms from suppliers
• eliminate debt by corporate restructuring
• improve efficiency and productivity of operations