A major reason so many small businesses go out of business is due to Cash Flow, even though they have a profitable Gross Margin. How can that happen?
If your business or part of your business is involved in buying or producing and selling products, then this article is for you. Keep reading.
Why are so many businesses struggling with Cash Flow issues?
The answer is in your Balance Sheet and how you manage your Working Capital. The definition of Working Capital is: Current Assets minus Current Liabilities. In simpler terms:
Working Capital = Inventory plus Trade Accounts Receivable minus Trade Accounts Payable
Every business that is growing will experiences growing pain for a simple reason. To achieve higher product Sales, you need to invest in more Inventory, which ties up part of your Cash. Your higher sales of products result in higher Accounts Receivable (A/R) and not all your customers pay in time, which ties up more Cash. On the other hand, your suppliers typically are insisting on timely payment, pushing your Accounts Payable (A/P). The result is a longer Cash cycle of invested money from the time you must pay your supplier to the point when you see the money back in your bank account.
The answer lies in efficient working Capital Management.
You get your first clue by looking at your Balance Sheet and whether your Inventory and Accounts Receivable have grown. Have you invested additional Cash in Inventory and A/R in the last few months or compared to last year?
If the answer is yes, stay tuned, as we will show you how to improve your Cash Flow through Inventory Control, A/R and A/P Management.