Poor Cash Flow is a Symptom of a Problem


Business Financial & Performance Management Series #3

“Poor Cash Flow is a Symptom of a Problem”

I can hear it now, “how can he say my cash flow problems are a symptom, no way, it’s a problem”.  Now to be sure, when you are having cash flow pressures the weight of this issue is a problem, and a problem that must be addressed.  However, the reason I say it is a symptom, is that there are underlying reasons why you feel pressure and have this particular problem.

Not unlike when you have a runny nose and a fever, which is a problem, there is a reason that you have these symptoms.  Perhaps a virus, perhaps an allergy, perhaps… The reality is that something causes the runny nose and fever, just like something is causing the cash flow problem.

So, now that we agree that you have symptoms of an underlying problem; let’s see if we can narrow down what the particular disease really is…

Maybe your staffing levels are too high, as evidenced by the labour rate as a percent of sales 3% above your target.  Therefore, by reducing your staff by an employee the resulting savings will bring you in line with your target rate, and free the cash otherwise payable.  But what if you are already feeling pressure to meet your delivery commitments and losing the extra person actually delays your delivery of product.  Would not this delay in delivery actually push out the receipt of much needed funds?  Maybe in fact you require extra staff to help accelerate production to meet your commitments and by extension speed up the receipt of funds?

Sales, blame the sales department.  They need to immediately increase their sales to 10% over target.  But what if you already have production issues and limited financial resources to cover the corresponding working capital required to service this increase in sales?  Not to mention that any discounts to encourage sales may erode precious needed margin!

Perhaps material costs have increased far above your budget.  Therefore, you will set upon a quantity purchasing mandate to buy in larger quantities to reduce unit costs.  Only problem is, to receive this discount you may need to pay in shorter terms putting more pressure on cash resources, not to mention increased storage space to hold the excess inventory.

Rent, must be rent.  When comparing to industry benchmarks your rent percentage is too high.  Therefore, you will immediately sublet a portion of your space.  Might help, but earlier we identified that you had challenges meeting delivery times.  What happens if reducing the available space causes production bottlenecks to occur because product cannot move smoothly through the production facility?  These bottlenecks will increase your labor costs and further push out the receipt on finished goods.

Free coffee, that’s it!  If you can reduce office perks then you will be ahead.  Perhaps, but what if removing the free coffee causes the staff to grumble (happens) and suddenly key personnel leave, resulting in lower experience, reduced throughput, and increased training costs for replacements?  Coffee suddenly seems cheap.

Maybe, it is a bit of everything, or something very specific that is hard to identify.  However, by analyzing the various cost centers and profit drivers of your company’s operations you will be better able to identify what is causing your cash flow challenges.

Jim Melville, CPA, CA