Only the other day I was working with a business which was very concerned about lack of cash flow, and so they should have been. The severe cash flow problems were imposing a significant workload on the wife in this husband and wife team. She provided the administrative support for the company, and the whole debacle was causing noticeable stress.
And because so much time was taken up fighting the fires, she couldn't concentrate on improving the business.
Evidence of the cash flow problems could be seen in the accounts. Analysis showed that the current ratio had been declining for some time and was currently 0.93. Short term risk is measured through the exposure of the company to requirements which must be met in the short term (i.e. less than 12 months). Essentially the company had only 93 cents available to pay every dollar of creditors.
So we looked at the average number of days taken for debtors and creditors to be paid. They were not very efficient in collecting debts. Although this is improving 75 days is well outside what would be considered acceptable in most companies.
It was of concern that creditors are paid much more slowly. It took nearly twice as long to pay creditors as to collect debts (75 days to 133 days). This could leave the company vulnerable to action by creditors, although the position is alleviated by the fact that creditors are much less than debtors. It turned out Creditors were funding the Working Capital requirements of the company.
If Debtors were collected properly, the company would have had enough money to pay the creditors. It will take some work to catch up, and more importantly, a proper debtor procedure, but it is fixable. And there will be so much more time to work on the company, less risk, and more importantly, a great reduction in personal stress.
We sometimes have to take the information we have and analyse it to see what is really happening in our business. As my old English teacher used to say "An illuminating glimpse of the obvious."
Some profit losses are pretty obvious - so you fix them.
BUT, what if you don't know profits are leaking, cash out the door?
Possible leaks could be anywhere.
Are there some clues or symptoms that are tell-tales?