Entrepreneurs Typically Don’t Have a Good Enough Answer to this Question

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I’ve been hard at work with clients and working on my book about cash flow. 

As more and more people approach our consulting company to solve their cash flow challenges, I realize that there is one question that most of them cannot sufficiently answer.

The Question
The question you need to be able to answer (and I will tell you how in this post): What is the root cause of your company’s cash flow problem? It could be a many different things. And of course, it’s usually a combination of a few things. Here are a few examples:
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​Your sales are trending down.
Your customers are taking too long to pay.
You struggle to pay for raw materials to make your products, so you are late shipping.
Your expenses are creeping up.

Why is the Root Cause Important?
It may sound obvious, but if you don’t know, you may be solving for the wrong problem. And completely ignoring the main one.

It your problem is inadequate initial capitalization (you didn’t start your business with enough money), the solution for that is going to be completely different than if you hired too many people, or your expenses are too high, or your sales aren’t high enough.

If your working capital is nonexistent, you can look at options like a working capital line of credit from the bank. If you have invoices to customers with good credit, you can explore factoring.
If your expenses are too high, you need to find out why. If your overhead is bloated, yes, you may need to lay off some people, or buy a less expensive car, or rent a less expensive office/home, or delay an expansion of additional space.

If you need to boost your sales, you may need to invest more money in marketing, or advertising, or hire a better sales manager. But make sure you do a thorough cost-benefit analysis to make sure it will be worth the investment. Sometimes, you can achieve an improved ROI with a smaller budget by being more creative.

If you didn’t have enough money to start with, you may need to consider raising some money through an angel investor, or a friends and family round to alleviate the problem. Raising money can be a full-time job in and of itself. If that’s what you need to do, it’s a completely different solution than hiring a sales manager or laying off your administrative assistant.

So how do you know what to do? That’s where the root cause comes into play. How do you figure that out?

Do a Thorough Analysis
The truth is in the numbers.

Invest in a membership and tutorial for an accounting system. I use Quickbooks by Intuit, but you can research other software systems. Ask your accountant, or get a referral from a friend or other entrepreneurs you know.

If you think you’re still too small to invest in accounting software, go through your bank and credit card statements, tally up all your deposits and purchases by month and do your own cash flow statement on a spreadsheet such as MS Excel.

A cash flow statement is cash in, minus cash out. It’s really that simple.

You don’t count cash in when you do the work or issue the invoice. You count cash in when cash come in. Same with cash out. However, I do like to keep a separate column showing when you booked the sale and when you invoiced the customers. That way, you can see if your customers aren’t paying you on time. That can be a huge contributor of cash flow problems.

It you track this for several months, or better yet, a couple of years, most of the time the root of the problem will become obvious.

Finally, if you have a question, ask me.

Whether you’re a solopreneur or a business owner, proper cash flow management can save your company. Or it can kill it. According to the U.S. Bureau of Labor Statistics, cash flow problems are amongst the top reasons why businesses fail.

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