How to Solve the High Sales - Low Cash Flow Dilemma

Solving the High Sales – Low Cash Flow Dilemma

For entrepreneurs, startups and small business, simply generating more sales might not be the answer. Successful businesses can still fail! Find out how to improve low cash flow to make your organization more sustainable.

Why low cash flow – not low sales – is the common lament of entrepreneurs

An article titled The Irony of Successful Sales Growth describes one of the challenges faced most often by small business owners and entrepreneurs as low cash flow. When an organization experiences low cash flow along with limited reserves and lack of resources (such as lack of investors or inability to obtain a bank loan), the seriousness of the situation can quickly become acute.

Many businesses that are successful – in that they are growing and increasing sales – can even create their own unique recipe for low cash flow when the need to purchase additional inventory, hire staff, or increasing operating expenses outpace incoming cash flow. This can be especially difficult for B2B sellers who often extend especially favorable terms to customers as a competitive advantage.

The entrepreneur’s lament is one of the great ironies of the marketplace;

a small business in danger of failure as a result of extreme success.”

(Jim Blasingame, The Irony of Successful Sales Growth)

But the challenges presented by low cash flow are not only limited to organizations like (B2B) business-to-business companies that sell to customers on terms. Retailers and service organizations also face the challenge of making hefty investments in inventories before offsetting sales occur. If a retail organization’s projections about consumer demand do not match up with actual sales, they too may find themselves in a cash crunch.

Perhaps the best news for business owners trying to solve the challenge of low cash flow is that it is a common challenge, and there are many ways for a business to improve its cash flow. We previously shared an article with ten ways to maximize business cash flow that might also interest you further.

Here are some of the solutions for managing the challenge of low cash (or slow cash flow):

1. Plan for growth so that you know where the money and resources needed for fast reinvestment will come from.

2. Avoid use of operating cash for non-operating expenses (such as purchasing capital equipment).

3. Closely monitor accounts payable and accounts receivable

4. Understand the relationship between Accounts Receivable Days (how many days it takes customers to pay) and Accounts Payable Days (how long you have to pay vendors).

Ideally, you will have the option to work with vendors who will extend terms that make it possible for customer payments to come in before supplier invoices become due; however, that is not always going to be the case.

You may be able to speed up customer payments by offering discounts to customers who pay on delivery or who pay very quickly, require customers to make partial payments or deposits up front and conduct more thorough due diligence checks before extending customer credit. Plus, you can spend more time and money on collections efforts rather than taking a more passive approach to unpaid invoices.

You might also like: Top 10 Reasons B2B Startups Might Fail

Stop chasing customer payments – factor receivables for fast access to working capital

B2B organizations that invoice customers upon delivery of goods or completion of services may be able to immediately improve cash flow and better manage receivables by factoring – or selling – customer invoices to a factoring company.

When a client factors (or sells) an accounts receivable invoice to us, they receive funding for up to 95 percent of the face amount of the invoice for a small fee, called a factoring fee, within 1-2 business days. In this way they can get access to the working capital they need to run and grow their operations long before their customer is required to pay.

Since factoring clients do not have to wait for customers to pay, they can reinvest in growing their business more quickly. They can also extend generous payment terms to their customers, which could create a competitive advantage.

Get a free, no obligation quote for invoice factoring or request more information about the invoice factoring process.

  • Average monthly sales or amount of invoice to factor

5 Places to Find Creative Startup Ideas

Creative startup ideas abound, if you know where to look for them. If you are an entrepreneur in search of your next creative startup idea, here are five places you might find the next big thing.

Creative startup ideas can help you beat the startup failure odds.

90 percent of 2019 business startups didn’t make the one year mark. But that didn’t quell the enthusiasm of U.S. entrepreneurs! More than 800,000 startups had opened their doors as of March 2020, up over 30,000 from the year before (Statista.com). With COVID-19 changing the way people work in the United States and around the world, the number of individuals dipping their toes into the startup business waters could be even higher going forward.

how many business startups launched in 2020

 

Among businesses that did not survive the first year, reasons for failure included money running out (inadequate financing), being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an expert in the industry.  So where can you find the type of startup business idea that can overcome the odds?

You might also like: Top 10 Reasons B2B Startups Might Fail

5 Places to Look for Creative Startup Ideas

Up or Down the Chain

If you already own one business or were part of a startup, you probably have a lot of expertise in the industry. It might make sense to consider a startup business that would be a natural customer or your last venture or which would be a supplier, vendor or service provider within the same industry. In either case, you will probably come to the table with an idea of how to “do it better” because of your experience.

Emerging Technologies

Keep your eye out for emerging technologies, especially those that have the ability to disrupt business for companies that aren’t able to respond quickly or refuse to recognize that their marketplace is changing.

Abandoned Ideas

Just because someone else failed at something does not mean that the idea does not have merit; plus, you can learn from their mistakes. Think about some of the new products or services that competitors put into play to determine which deserve a second look, and perhaps a second chance.

Under-served Markets

It’s simply not possible for an organization to completely serve multiple market segments; usually one or two will get the most attention in product or service development as well as marketing. When you see a market that is under-served by a particular industry, you are seeing opportunity for someone willing to startup a niche business tailored to their needs and demographics.

Gaps

Did you ever say, “I wish there was a solution for this problem?” You probably aren’t the only one. When you spot an industry, field or community with a gap between a consumer need or want and a business solution, you may be seeing the perfect opportunity for a startup business to fill the opening.

Entrepreneurial Addiction? Solid Planning Turns Startup Ideas into Reality

Since one out of every four startups fail in year one, the right startup ideas could make or break your chances of success. In many cases, clients come to us in the early years of their business when they come up against a need common to many startups and young businesses, that of a need to access working capital more quickly in order to grow. One of the things that gives us the most satisfaction is knowing that we were able to put financial tools into place to help a client with great startup ideas grow to the next level.

While we do not provide true start-up financing, we can help an organization access working capital almost immediately. Companies that sell B2B (business to business) can factor invoices in order to speed up cash flow, instead of waiting on customer or third party payments.

We hear from individuals startup ideas on a pretty regular basis. Hey – we’re entrepreneurs too! We thought that it might be helpful to talk about the types of startups that may do well in the coming years as well as directions that entrepreneurs might look for startup inspiration as they ponder what their next new venture will be.

Several of the reasons startups fail (inadequate funding, poor research, lack of market demand, etc.) can be addressed at least in part through business planning. No matter how excited you are to launch your startup idea, take the time to write a business plan that includes solid projections, a marketing plan, realistic costs, and market research.

 

infographic - startup ideas business plans