What are some of the common cash flow challenges that you face in your industry?

In the education industry in Latin America, students often fall behind on their payments until the semester turn, when they need to negotiate to re-enroll. This cultural delinquency creates a significant gap in the cash flow of educational institutions, which continue to bear all fixed costs. Being prepared for this seasonality can save the business, ensuring that it has enough cash on hand to weather the semester without resorting to bank loans.

I've worked with many merchants that were seasonal, with spikes in business due to a regulatory event every year (hunting season), or business changes based on the weather. The best thing a business can do is make sure to not over hire nor under hire, make sure to keep adequate levels of cashflow, and make sure to capitalize on their busy season by planning months in advance.

Another common cash flow challenge for businesses is managing inventory effectively to avoid overstocking or stockouts, which can impact liquidity. Additionally, high fixed costs and variable revenue can create cash flow fluctuations.

I’ve worked with a company that had a customer who paid on end on month plus 90 days terms. They were their most prestigious and profitable customer, but they were a nightmare for cash flow (and a great example of the difference between profit and cash). They could have broken the company’s cash flow. They didn’t because they were carefully and creatively managed through a variety of strategies including: advance invoicing, invoice finance (fees were bundled into the gross margin) and negotiating extended payment terms with suppliers. The financial acrobatics and juggling were stressful and time consuming though and thereafter the company successfully negotiated 30 day terms from all their customers, large or small.

I've worked with many B2B clients that billed using Net D, which is to provide services/products upfront but to invoice their clients and not be paid until 30 to 180 days later. This creates Accounts Receivable (AR) for the Supplier and Accounts Payable for the Supplier's client. AR Financing or Factoring could be utilized to help with cashflow crunches while awaiting payment. Trade Credit Insurance is another product that could be used to help manage the risks of self-insurance in this regard, as many Suppliers end up holding a lot of Bad Debt.

Utilizing factoring may result in sacrificing a portion of profitability, but it is essential in ensuring financial health. This advance on receivables can solve cash flow problems, securing payroll and supplier payments, thereby keeping operations intact regardless of the industry's seasonal fluctuations.

Companies should always strive to be as lean as possible, which includes not having too much real estate, too much equipment, or too much overhead in general that increases cost of operations, which will decrease profitability. Businesses should try to predict profit margins upfront so that they can anticipate how much they can take on in terms of cost of operations and from there, that should lead their decision in terms of leasing/financing/owning fixed assets.

Identify the largest items in your budget and directly reduce costs in those areas. Avoid expending substantial team energy on cutting insignificant industry costs, such as coffee expenses. Instead, focus on relevant fixed cost lines. For example, if your largest fixed cost is office rent, assess the feasibility of transitioning part of your team to remote work and relocating to a smaller office space.

Rapid growth is a blessing, but it can quickly turn to a curse if not managed properly. Companies should closely watch their business trends to anticipate growth patterns and scale their businesses accordingly. Warning though, be careful not to add too much overhead in terms of more buildings, people, and technologies than absolutely required, because a rapid downturn in business could create a lot of havoc due to needing to quickly downsize.

Scaling a business is often a challenging endeavor in terms of cash flow. The most crucial step is to ensure that you have a solid investment fund in place before starting to build the necessary operational infrastructure. Alternatively, securing an aggressive line of credit is vital to avoid financial precariousness, ensuring that there will be sufficient cash flow to maintain the business's financial health each month.

Rapid growth can positively impact cash flow by increasing revenues which, if collected promptly, improve cash flow. It can also attract investors, providing additional cash to support expansion & operational needs. However, rapid growth can also require significant upfront spend on inventory and operations, alongside larger accounts receivable, which can strain cash flow if spending is required before cash is received from sales. Inefficient systems & processes not optimised for scale can exacerbate this strain. Strategic planning & efficient operations combined with effective cash management systems - regularly updated forecasts, optimised stock levels, rigorous credit control processes & cost control measures - are therefore essential.

New tax laws, industry standards, and other regulations are a normal course of life in just about every industry. Always keep a close-knit network of professionals in different aspects of law, so you can remain aware of potential changes and make the necessary moves for compliance.

The risk of regulatory changes in some industries is constant. However, depending on the size of your business, maintaining an adequate team of specialists and lawyers to monitor and assist with compliance can be a significant fixed cost. Therefore, it is essential to allocate a portion of your budget to potential regulatory changes and to consider hiring a consultancy that can provide more cost-effective and assertive monitoring and support.

Information is the key to cash management. Have a great internal accountant, bookkeeper, or service to help you with the accounting, but ask for information daily. Most accounting software has reporting built in, or has the ability to create custom reports. Business owner and managers should be checking their numbers and bank accounts daily. Some basic reports to pull daily would be your daily bank activity from your bank, AR aging, AP aging, and your income statement.

Project work that spans several months can be a real challenge for cash flow so robust project management is essential. Budgets need to be set and monitored, resoures deployed efficiently, project milestones and staged payments agreed and stakeholders managed effectively. A change management process needs to be in place to deal with any scope creep or project drift. All this needs to be supported by a cash flow forecast with built in flexibility so that various scenarios can be modelled and planned for.

One thing I found helpful is to have a separate account for sales tax. Moving the money into an account separately can help remove the temptation of using that money for something else.