Do you know the number 1 reason businesses fail?
It’s not from lack of profitability. It’s not from a lack of customers. Or poor customer service, or bad marketing or even from negative reviews… Though all these things can contribute.
No, the number 1 reason that businesses fail according to business insolvency experts is from a lack of cash flow. Helping you get paid is the reason that we exist – everything we do can be linked back to improving your cash flow.
You’ve probably heard the term “Cash flow is king” so, what is cash flow, how does it cause a collapse and what can you do to avoid a lack of cash flow in your business?
What is cash flow?
Cash flow refers to the net cash coming into and out of a business. Cash coming in from customers, creditors, grants, loans and the like is called inflows. And cash going out to employees, the IRD and suppliers etc is called outflows.
Cash flow is different to profit in that profit is the cash left over after all expenses have been paid, whereas cash flow is the sum of all cash both inflows and outflows within a business.
Cash flow is a good indicator of a businesses strength. If your business wants to finance a new piece of machinery for example, a bank or lender will most likely want to see a cash flow forecast (and a credit report), to assess your ability to service the debt.
If you don’t get paid by your customers, you can’t pay your suppliers. That is a lack of cash flow.
How can a lack of cash flow cause a collapse?
You can have a solid number of customers and great profitability, but if customers do not pay you on time then that lack of cash flow means you now have less cash to pay your obligations (tax, employee pay, suppliers) and this can very quickly compound into a fatal, unrecoverable spiral for a business.
This downward cash flow spiral can happen very quickly with very few businesses finding their way out.
If you then have no cash and cannot pay your bills, your business is technically insolvent. Your suppliers or the IRD for example may apply to place your business into receivership or liquidation to recover what they are owed.
Once the liquidators are involved, you no longer have control of the process or the outcome.
So, what can you do to minimise your risk?
Here are 6 things you can do to minimise the risk to your business and ensure your cash flow is protected.
1. Escalate overdue invoices early
Don’t let overdue invoices age – time and inflation make invoices worth less. We know from experience that the sooner an overdue debt is escalated to us, the more likely we are to recover that cash for you. We recommend escalation at 90 days.
2. Use accounting software
Use accounting software to track your cash flows and automate invoice reminders, we recommend MYOB or Xero. These applications can also load your overdue invoices directly to us for resolution.
3. Maintain a cashflow forecast
Understand what your cash flow looks like from month to month to help ensure that you can spot problems early enough to act. Your accounting software should be able to do this for you. We have a guide available here.
4. Have robust terms and conditions
Ensure your terms of trade are current, legal and clearly set out obligations, allowing you to conduct credit checks and pass any recovery costs onto your customers in the event of a default. Our Business Support Specialists can help.
5. Credit check all new customers
Take the guesswork out of bringing new customers on. Our Credit Reports will give you objective data to make an informed decision as their credit-worthiness.
6. Talk to the experts
Our Business Support Specialists can share information and experience on the best ways to protect your unique businesses cash flow and understand your risk exposure.
About EC Credit Control
We are a New Zealand owned credit management agency that has been supporting Kiwi businesses for over 30 years. As a specialist in debt resolution and developing business terms and conditions of trade, we have the tools and expertise to help minimise the risk to any business that offers credit. For a free no-obligation consultation, get in touch with your local Business Support Specialist.
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Call us today at 0800 324 768 or fill in the form below and we will be in touch as soon as possible.