How You Can Avoid The 5 Cash Flow Traps That Almost Ruined My Business

By Ken Green
Contributing Finance & Tax Expert

Several years ago, when I started a business with my business partner, we faced a number of cash flow challenges, as we did not pay close attention to these 5 key drivers of poor cash flow. If you run a business, you will agree that cash is critical to keeping your doors open. As they often say, cash is king!

Here are the 5 key insights I learned, from my experience dealing with cash flow issues and under-capitalization of the business, very early on.

Low gross margin
Following a close analysis of our margins, my partner and I realized that the low margins on our sales was a critical contributor to a lack of sufficient cash flow in the business.

This was primarily, due to the low fees we charged, early on in the business. In our attempt to quickly acquire clients, we went low on fees, and provided services similar to other providers. We essentially competed on price, rather than on value.

We could not justify charging a higher fee, due to the lack of differentiation in the market place. To address this concern, we now invest in ways to differentiate our services from the rest of the market. We are continually working on different ideas to change service delivery and add more value to our clients.

If you are able to offer more value to your clients, you can charge higher fees for the value you provide  —  value that clients cannot get from your competitors.

Slow-paying invoices
At some point in my business, this was a big concern, as we had thousands of dollars in receivables that were 30 days, 60 days and, sometimes, 90 days past due.

The impact on cash flow can be significant, when invoices are not paid on time. For some understandable reasons we were shy to ask our clients to pay. Our clients are busy professionals and business owners, so, most often, they simply forget.

As business owners, it is our responsibility to remind clients to pay. To address this problem, we implemented a few things, like:
> Requiring upfront payment of a certain percentage of the total fees, prior to commencing the engagement;
> Invoicing more timely;
> Following up more frequently on unpaid invoices;
> Offering early payment discounts;
> Implementing monthly or quarterly recurring pre-authorized payments; and
> Automating the process to remind clients of unpaid invoices.

High overhead expenses
Every business will have overhead expenses that must be managed, closely. The overhead expenses impacted our cash flows and we found it challenging to cut in this area.

What we did was to look for cheaper ways to pay for the key things we needed. For example, we cut our radio advertisement, which was expensive, and spent a fraction of that money in running events and online marketing.

Bad debt
If you’re in a business like ours, you will likely deal with bad debt. While the impact on our cash flows is less for this issue, compared to the others, we have had our share of bad debts.

These are clients, who just don’t pay part or the entire invoice. Requiring upfront payment has minimized this, and implementing a more robust client-engagement process is something we are refining, to help substantially-reduce the likelihood of bad debt.

Slow investment or capitalization of the business
A growing business requires capitalization to fuel that growth. You can capitalize one of two ways  —  reinvest your profits into the business, or add debt to the business, by borrowing.

In running our business, we’ve used both options but, to a limited degree. Although our business has grown, over the last few years, the growth has been slow, principally, because we’ve not been aggressive in throwing more capital to fuel growth.

Growing a business is a double-edged sword. On the one hand, it can put significant pressure on your cash flow. On the other hand, if successfully implemented, it can add a lot of new cash flow stream to your business.

We’re now at a place in our business, where we feel comfortable increasing the capitalization of the business, a little bit more aggressively, than we’ve done in the past.

We continue to minimize owners’ draw from the business, so we can leave the capital to invest in growth.

The key here, is to have a long-term view of your business that will enable you to invest more in the capitalization of the business.

I hope you find a few points from this article to improve your business cash flow. In upcoming articles, I will look into other core areas of running your business.

Ken Green, who has an MBA from the Schulich School of Business at York University in Toronto, is a Chartered Professional Accountant (CPA) and entrepreneur. He runs a professional accounting practice — GMS Professional Corporation — with his partner, Celia Meikle, and the support from their loyal employees. The firm provides accounting and bookkeeping services, tax planning, business advisory and financial planning. He can be reached at: 905-919-3543; or ken@kengreen.ca.