Do you know your cash absorbers?

The feeling of always having to fight against cash flow obstacles is not strange to most entrepreneurs. Constantly being confronted with the financial facts because there is not enough ‘working capital’.

One of the most crucial aspects of successful entrepreneurship is effective cash flow management. But sometimes it seems like there are forces that will suck up your cash flow, no matter how hard you work. As an entrepreneur, you are constantly trying to find (often new) ways to further grow and prosper your business, but this often requires money.

It seems like you are constantly in a boxing ring fighting against financial pressure, late payments and unexpected events that impact your cash situation.

Do you know that feeling too? Let’s look at some of the ‘cash flow drainers’ and how you can best deal with them.

Cash absorber 1: Using payment terms and conditions that are too long

Using long payment terms can have a major impact on your cash flow. For example, when you need to pay invoices quickly yourself. It doesn’t sound logical that your customers have months to pay you. You are, as it were, playing bank for your customer and worse, this can lead to serious liquidity problems.

Longer payment terms always result in delayed payments and slow cash flow.

Cash absorber Solution 1:

Consider shorter payment terms for your customers. You can also encourage them by offering a discount for early payments and thus get them to pay faster. Another leverage is to openly discuss the payment terms used by your company when signing the quotation or order form.

Then have them sign these conditions for approval and clearly describe what the consequences will be if they are not complied with.

Cash absorber 2: Your customers’ slow payments

Some customers tend to be slow to pay, which can slow down your cash flow and put pressure on your liquidity. This is often also sector-related or linked to the type of customer. I am thinking, for example, of the construction sector and customers who do not apply strict payment conditions to their customers.

Cash absorber Solution 2:

Be proactive in collecting outstanding invoices. Always act very quickly here and send reminders and call customers to discuss payments. Also, do not be afraid to apply your previously agreed payment terms and associated consequences: e.g. do not continue the works/services if payment is not made on time, for projects/deliveries that are carried out in different phases.

Cash absorber 3: Efficient inventory management

Too much inventory can literally tie up your cash flow, while too little inventory can lead to missed sales opportunities. Nothing costs as much as a “dormant stock”.

Cash absorber Solution 3:

Be very sensible when collecting stock, therefore try to negotiate with your suppliers that they can deliver “just-in-time” (for example within 24 hours) or propose a “Drop shipping” system, which is delivered directly to the customer or the yard will be delivered. Just-in-time deliveries can be especially interesting for small(er) quantities ordered. Please note: this is not always possible.

Consider investing in inventory management software that helps you predict demand patterns and optimize your inventory levels. Regularly analyze your inventory and adjust your purchasing strategies accordingly.

Cash absorber 4: Seasonal factors and sectors

Seasonal industries and businesses can have a major impact on your cash flow, especially if you operate in an industry that is highly dependent on certain seasons. Consider, for example, weather conditions; harvest season; whether or not a holiday period; … this often has an impact not only on your inventory management, but also on staffing.

Many of these patterns usually occur every year, but some years can be worse than others. For example, the weather may be better one year, but not the next. And yet many entrepreneurs are caught up in this every year and wonder every year how things got to this point again.

Cash absorber Solution 4:

Plan ahead and take seasonal fluctuations into account when creating your budgets and cash flow forecasts. Diversify your offering if possible to stabilize revenue streams.

Plan your incoming cash flows better based on your peak moments where a good inflow of cash can be expected and you can thus build up a reserve pot.

 If your company and production process is flexible enough, you can develop a side project with activities that are less weather-sensitive or seasonal, to absorb the more ‘dead moments’. Beware of a possible pitfall: Your focus could change, causing your core business to fade into the background.

Cash absorber 5: High investments and operating costs

Large investments and high operating costs can put significant pressure on your cash flow, especially in the early stages of your business or during a period of lower income. For example, there are sectors (e.g. construction sector) that are confronted with high operational costs: material, labor, equipment, raw materials, transport, energy…

If you as an entrepreneur do not know exactly what costs you have to pay every month, then you have a problem!

Cash absorber Solution 5:

To get started, think carefully about your investments and ask yourself some critical questions: Do you need to replace your equipment now? Should I buy a machine or tool now if I only need it once or twice a month? Could second-hand equipment be a consideration? Is this investment really that urgent? …

Really, these are cash flow absorbers. If you don’t manage it properly, your cash flow will simply be eaten up.

And if the answer to the above questions is always “YES”, consider alternative financing options such as (win-win) loans, external investments or bridge loans to raise capital without putting too much strain on your cash flow. It may put less strain on your cash flow, but attracting external money also costs money… so make a well-considered cost-benefit analysis.

Cash absorber 6: The impact of economic uncertainty

Economic uncertainty can lead to fluctuations in market demand and financing options, making your cash flow unpredictable. In some cases you can even link this to seasonal factors.

Cash absorber Solution 6:

Be flexible and adapt your business strategies in accordance with changing economic conditions. Always assume the worst-case financial scenario in your planning and maintain a healthy cash reserve to meet any unforeseen challenges. It can only turn out better in retrospect.

Cash absorber 7: Inadequate budgeting and planning

I have often talked about “better planning” in the Cash Absorbers above, well… here too, a lack of accurate budgeting and planning will lead to unexpected expenses and unforeseen shortfalls in your cash flow. In any case, it will lead to extra unexpected costs and expenses.

Some examples: Imagine if you didn’t take into account the taxes you have to pay annually? What if the expiry dates of your insurance policies all fall in the same month? What if you haven’t set aside any money to pay for holiday allowances and end-of-year bonuses?

Cash absorber Solution 7:

Take the time to prepare detailed budgets and cash flow forecasts and update them regularly, this is really not an annual activity, but rather a monthly occurrence. Regularly monitor your performance against what you have set and make adjustments where necessary.

Cash absorber 8: Unforeseen circumstances for which there is no buffer

The lack of a financial buffer can make you vulnerable to unforeseen events such as economic recessions, natural disasters or pandemics. Unforeseen circumstances, for example in large projects, can often impact cash flow.

Unforeseen circumstances always lead to additional (unforeseen) costs, because you have drawn up your planning and budget for a certain period and now this has to change completely. It is also not obvious for your team that you will now have to ask for a lot of flexibility.

Cash absorber Solution 8:

I don’t have a truly innovative solution for you here, or at least not a solution that has been discussed before. It is difficult to plan here because you do not know when unforeseen circumstances will surface.

You can keep in mind that something unexpected will happen at some point. All you can do is ensure that you have a financial buffer and that your business processes are flexible enough to accommodate these unforeseen situations.

Also ensure that you have a “Contingency Plan” where every employee involved knows what is expected of him/her in such situations.

Conclusion:

Managing your cash flow effectively is essential to the success and resilience of your business. By proactively dealing with the cash flow drains described above, such as long payment terms, inefficient inventory management and economic uncertainty, you can strengthen the financial health of your company.

By carefully budgeting, planning, and building a financial cushion, you can protect yourself from unforeseen circumstances and maintain a stable cash flow no matter what challenges come your way.

But don’t make yourself any illusions… your company will never be 100% exempt from cash flow guzzlers. However, the message is that as entrepreneurs you can limit damage by thinking about this proactively.

Would you like to know more about this and determine the right strategies for your company and do you want to know what Wizzdom can do for you? Then request a free strategy session below

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