How to Solve Cash Flow Problems as an Established Entrepreneur Running an Existing Business

Are you worried about cash flow?

And looking for solutions to your cash flow problems?

Then this article is for you because here I am going to share with you?5 cash flow problems that businesses that have been running for a while face, and solutions to each of those problems.

I have learned these through my own experience as an entrepreneur and also as a financial coach advising businesses with a revenue range of ￡40k to ￡40m.

5 Cash Flow Problems That Even Experienced Entrepreneurs Face and How to Solve Them

Let’s dive in.

Problem #1 | Low Profit Margin

In 2018, a business with $100,000 in revenues, had a net gross profit margin (after variable expenses) at 40%, and a net profit margin (after fixed expenses) of 15%.

In 2019, the business increased its sales by 10% to $110k. Its net gross profit margin dropped to 36% and the net profit margin dropped to 9%. To $9900 and so there’s a drop of $5100 profit.

See the table below for reference.

Such change is not unusual because as a business grows the cost of sales also goes up. But it is not healthy. On a small revenue base, a 9% profit margin is not much for making investments in business growth.

The owner of this business couldn’t possibly run an additional marketing campaign because if they run it, and if they don’t generate enough sales first, their small profit may turn into a loss and this will result in negative cash flow.

Solution

To solve this problem of low-profit margin, increase the prices. It will, of course, be easier if your business has a brand that customers trust. They come to you for a solution to a pressing problem they have and know you can solve that problem.

To increase your price to a point where you can return to earlier profit margins, or that allows you to invest in growth.

Problem #2 | Have to Reduce Selling Price

This can happen due to fierce competition and lead to low profits.

Let’s say your sales price is $100 per unit, now you have to drop it to $90.

Earlier you were making $15 profit per sale, now you are making only $5 per sale as net profit because your costs of sales and expenses remain the same.

Solution

One of the things you can do to offset this is to?increase your average order value (AOV).

You can find inspiration for this, in?McDonald’s “Would you like fries with that?” line. This prompt plays a big role in helping McDonald’s serve about 9 million pounds of fries globally — per day.

So what you need to do is increase the average order value in your business, by finding your version of ‘fries’, or even better add ‘fries’ and ‘shake’. So instead of the one, you can add sequential prompts to buy two more products for someone who orders your $100 product. This will give an instant boost to your profits and improve your cash flow.

Problem #3 | Limited Funds for Growth With Cash Tied Up in Debtors, Stock

When you have run your business for a while, there will come a time when your business grows faster than before. As a result, you will serve a lot more customers. And in that case, it often happens that many of those customers won’t pay on time. These are the debtors in your business. And, when debtors increase beyond a point, you are making sales but you no longer have enough cash flow to cover the bills to pay.

The delay can also happen when you offer 30, 60, or 90 days payment terms in your business. In that scenario, you make the sale today but you won’t be paid until 30, 60, or 90 days later. So, you’ll have a cash imbalance in your business because the money coming and money going you won’t match up because your fixed costs will keep on piling and you will continue investing in stock because to be able to deliver the product to new customers.

Solution

Get a bank loan or an overdraft facility or bring equity partners on. You have a greater chance of securing funding as you have a proven track record.

An existing business can reach out to banks and equity partners in such a scenario because they have a track record and proof of sales to show. How long you have been in business, and how well you have repaid your previous bank loans will also have a bearing on the terms you get from your bank. This will give them confidence that they’ll get their money back, and you will be able to get a loan at lower interest rates.

And, if you are a startup with existing revenues and customers, you have a chance of getting better terms from equity partners. That means, you’ll have to part way will smaller equity to get investment from investors.

With this cash infusion, you can get rid of cash flow problems and keep your business growing. And it will be wise to fix what causes the cash flow problems in the first place, like really long payment terms. Shorte cash receivable cycle.

Problem #4 | Cash Extracted to Invest in Other Business Resulting in Working Capital Cash Crunch

When things are going well in your business, there is a temptation to extract cash and invest in a second business. The cash flow in one business may be able to support one business. But it may not support both businesses, one of which is yet to generate enough cash flows.

This happened with one of my clients. He wanted to invest in new business and took cash from his existing business, resulting in a working capital crunch. The other business did not perform as well as he expected. And the working capital crunch in his existing business had him worried about cash flow problems.

Solution

Whenever you have an opportunity to invest in a new business?and you plan to make money from your existing business to make that investment,?make sure that you have at least six months of cash flow cushion?for these two businesses. Then only take the leap. That way you don’t miss out on the investment opportunity, while also ensuring the sustainability of your existing business.

Problem #5 | Loss of Big Contracts Leading to a Significant Drop in Cash Flow

This problem arises when a business loses one or two of its biggest contracts that accounted for as much as 50% cash flow.

This situation can happen unexpectedly, like due to a market condition, or because of the client going bust, or due to a crisis in a particular industry.

Now if your business is the one serving such customers, you’ll already have existing infrastructure built to serve them. If such a client parts ways with a 30-day notice and 50% of your revenues are wiped, you can’t possibly tell your staff that they have been made redundant.

And you can’t get rid of leased space, even if you want to, because of your contract with the landlord. Even if you ask the team to leave, it is not a good sign, because the word spreads and when you need good people, no one will want to come and work with you again because people will know there is no security and your business will be seen as taking advantage of someone when you need the most and throw away later. So, you need at least three months of notice from employees.

Solution

To stay clear of such problems?don’t rely on a few high paying clients and have more than one revenue stream, so that if unexpected events happen and one or two big clients leave you then you don’t have to face a cash flow crunch and force you to take drastic measures.

There you have it, 5 cash flow problems that entrepreneurs face, and how to solve them and?avoid being part of 82% of businesses that fail because of cash flow problems.

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If you like videos more than words, then I published a video where I talk about these cash flow problems and solutions, you might want to check it out below.