The Cash-Flow Roller Coaster of Small Business

One of the patterns we see in small business is this rollercoaster effect with cash flow. Some months there seems to be plenty to go around, other months it’s a real struggle. And if you’re in this position, it’s bloody hard to grow your business at the pace you would like to.

There seems to be two main causes for this phenomenon.

Lack of provisioning

A lot of small businesses in Australia pay their GST and income tax instalments quarterly. This comes at around the same time that super falls due. Payroll tax too, if you’re at that level. So, a lack of adequate provisioning for this cash drain can accentuate the boom/bust or rollercoaster effect.

Potential cause # 1

Your business may be chronically short of working capital.

Solution – Working capital can come from:

– Retention of profits
– Bank overdraft or similar
– Injection of capital by the owners

Discussion

In this instance, the retention of profits may be difficult – after all, if there were a good level of profitability, you may not have this issue at all! However, to break the cycle, you do have to do something different. That might mean having a good, long think about how to increase sales or it is possible that you need to pull back on spending to build your reserves.

Similarly, it can be hard to get the bank to come to the party, especially when you need them! A good time to get an overdraft in place is when you actually don’t need it. Still, if it is growth that is sucking up your cash flow and you can demonstrate good, consistent profitability, an overdraft can give you vital breathing room and the confidence to keep pushing on.

Is an injection of capital a possibility? Is it sensible? Again, if a lack of cash is what holds you back or causes you stress, then taking this option may make sense to deal with that lack of cash. Just be sure you’re not digging holes for yourself. If there is something fundamentally wrong with the business, you need to fix that before you take any capital – from your personal assets or from anyone else, for that matter.

Potential cause # 2

Your sales process ain’t what it should be.

Solution – fix it. Obviously, first you need to know where it’s broken.

Discussion

We find that most people can fairly reliably predict their spending. So, that being the case, the issue lies with predicting what is coming in, not what is going out.

The clue is perhaps in the rollercoaster nature of your cash inflows – most commonly, this indicates to me that your cash flow is following your attention and effort. It also indicates to me that there is no real process – beyond the personal effort you or others can and do expend.

You will probably be familiar with the concept of a sales funnel – essentially, the pattern by which prospects become known, then become leads and so on until they either fall out of the funnel or become a sale.

Since in small business we lack resources, what can happen is that we focus too much on one part of the sales funnel, to the detriment of the other. We focus where our need is greatest.

If we are short of sales, we make a big effort to push people through the funnel to become a sale. The cash flow follows but now the pipeline is empty.

Not to worry, there’s cash in the bank so we can deal with it. When the cash starts to run low, we get cracking on filling up the pipeline again. Then things get really tight and we have another push for sales.

Sound familiar? It might, because it’s quite a common scenario.

So, learning to apply an even amount of effort across all parts of the sales funnel is important. Of course, it may not be a learning thing – it might be that if you want to break the cycle, you need to invest greater resources in this area of the business.

Whatever is causing this cycle in your case, one thing is for sure, if you keep doing what you’ve always done, you’ll keep getting the same result. Something needs to change.