Avoid Cash Flow OR Why Growing Your Business Can Kill Your Business Part 1
  February 27, 2015

Why Growing Your Business Can Kill Your Business
Part 1

In the quiet times/holidays it is important to chase outstanding invoices, finalise and send out invoices for completed works (if you do not have automated systems), follow up clients to confirm projects are going ahead and calculate if you have enough cash in your bank to pay suppliers, along with paying yourself a wage! For business owners, managing this ‘cash flow stress’ is critical for survival.

A lot of business owners will be beating the cash flow stress this coming year by planning to grow their business.

In this article we will highlight why ‘selling more’ will not alone break the week to week cash flow headache, but how in fact it can kill a business.

 

The Facts

The majority of construction and trade service businesses are operating under pressure from inadequate cash flow. Figures released from ASIC reveal 24% of businesses which became insolvent in 2013/2014 were from the construction sector, which was the highest of any industry. According to ASIC 41% of company failure was due to inadequate cash flow.

The problem for a lot of Trade business owners right now is that they do not know if the money currently sitting in the business bank account is actually theirs, or if it belongs to suppliers and the ATO. Through operating day to day, week to week, month to month; large chunks of money is deposited into the bank account and large chunks of money is debited from the bank account. For the business owner it is either feast or famine, with no real control over their cash.

 

 What Causes Cash Flow Headaches

The common question we often get; through assisting tradies gain control of their business; is “how come the busier I get the less money I have in the bank?”

From our experience the main causes of cash flow problems within the construction industry are:

1.  Failing to Manage Growth

2.  Pricing Too Low

3.  Lack of Cash Flow Planning.

In Part 1 we will look at:

Failing to Manage Growth

Sales are up and the owner has failed to adequately take into account that he must now:

  1. Hire more employees (recruitment, training, tool box talks, performance management);
  2. Expand capacity (vehicles, tools, office, warehouse, equipment);
  3. Increase administration (pricing, systems, quotes, invoicing, collections, payables, payroll, ATO);
  4. Increase customer service (quality control, compliance, defects, follow up, meetings);
  5. Increase material purchases (inventory controls, wastage, theft); and
  6. Incur other drains on the business cash supply.

However, collections from the increased sales often lag behind as the company grows and the result is a cash crisis and time management crisis for the business owner!

In Part 2 we will look at Pricing Too Low.

 

Your Take Away

  • Grow Slowly – You must adequately plan and forecast all cash and time investments required to grow your business.

 

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