Episode 88

Navigating through a cashflow crisis

A cashflow crisis can happen to a business owner in any stage of business, even if you are running a successful business.

In today’s episode, I share about my recent experience with a cashflow crisis and how I navigated through it so you can do the same if finances are ever tight in your business.

 

In this Episode:

  • 02.31: Who can be affected by a cashflow crisis
  • 05.12: How does a cashflow crisis happen
  • 06.46: How to navigate through a cashflow crisis
  • 10.21: How to avoid a cashflow crisis

 

Links:

 

Transcription

A cashflow crisis can happen to a business owner at any stage in business, even if you’re running a really successful business. In today’s episode, I’m going to share about a cashflow crisis that my business recently went through and share with you exactly how I navigated through it so that you can do the same if cash is ever tight in your own business.

 

Hello and welcome to the Clare Wood podcast, where myself and incredible guests share about money mindset, financial successes, and how to manage your money in a fun and practical way to create wealth and abundance in both your business and your life. I’m your host, Clare Wood. I’m a business coach and a money mentor. I strongly believe that money has the power to positively change the world. I can’t wait to help you transform your mindset around money, create a love of numbers, and build the business of your dreams so you can live a life of financial freedom, giving and global impact.

 

A really great place to start this episode is distinguishing between profit and cashflow. Profit is the amount of money left in your business after all of the business expenses have been paid. So the revenue that you have in your business less the expenses equals your profit. Sometimes you can earn revenue without the money physically hitting your bank account. An example might be, if you’re a web developer, someone says, “Yes, I’d love for you to go ahead and build my website.” They pay you a 50% down payment, but because there’s a contract in place, they are obligated to pay you the full amount of the contract, but only 50% of the cash that they have committed to pay you in time has physically hit your bank account. That is your cash flow, the cash that physically hits your bank account.

 

Similarly, on the expense side, you might have obligations that you have to pay, but you haven’t actually paid them as yet. So you can see that even though you might be running a profitable business, or even a business that’s operating from a loss situation, it might be reflecting a really different position to what is physically sitting in your business bank account.

 

Who can be affected by a cashflow crisis

 

So let’s talk about what happens when there is a cashflow crunch or cashflow crisis. Who can be affected by a cashflow crisis? Any business owner can be affected by cashflow. Even huge corporates I have worked in that were turning over hundreds of millions of dollars a year, went through times where cash could get really tight, if not dire. In my time as a business coach, I’ve worked with all kinds of business owners with really profitable businesses who went through times where cash got really tight.

 

In fact, one of my clients was turning over a million dollars a year and her business still didn’t have sufficient cash for her to be able to pay herself a wage that would cover her personal expenses. Like I shared in the introduction, being really vulnerable here, I recently went through a really tough time from a cashflow perspective in my very own business. You might wonder how can someone who’s running a profitable business go through a tough time from a cash perspective?

 

So let me share from my particular example, how this came about. When a business is growing rather quickly, what happens is that you suddenly get these big chunks of money coming into your business. But as your business is growing, you might often need to invest a lot of that back into the business. In the circumstance where my business was growing, I was investing a lot of my revenue back into my business coach, or the future of my business, and I was also expanding my team at the time. I was using a lot of hours for my virtual assistant, and I was also investing in a lot of training and courses to set my business up for future success.

 

Outside of the business, there was also a lot of personal stuff going on from a health perspective in my family that required us to invest a significant sum of money that we were not anticipating we might have to pay out. Another thing that happened was that our car had a major issue, which costs us thousands of dollars that we weren’t anticipating that we’d have to outlay. So in my particular circumstance, even though the business was running really profitably, all of a sudden cash became really tight really quickly.

 

How does a cashflow crisis happen

 

So how can a cashflow crunch come about for any business? Some examples could be when your business grows really quickly and suddenly you’re incurring taxes, additional costs that are associated with an increased revenue. Tough cashflow times can also come about when people don’t pay their invoices on time. Generally, my clients are fantastic at paying their invoices on time, but something that I’ve noticed pretty consistently since I’ve been in business is that during the Christmas period, because everyone else’s cash position gets a bit tight, people tend not pay their invoices on time. And given that there is a whole chunk of time off between Christmas and new years, and sometimes people even take weeks off into the new year, I have personally found that I frequently have invoices that are regularly paid on time that are three, four, even five weeks late on their usual payment timeframes.

 

Another reason that you could go through a cashflow crisis is that your business is growing rapidly, and as a result, you decide to invest heavily back into the business. This isn’t necessarily a bad thing, but sometimes we can be investing in a really, really big way and our cash position can struggle as a result of it.

 

How to navigate through a cashflow crisis

 

So I’ve spoken about what a cashflow crunch is and how it can come up even in really successful businesses. But I bet what you want to know is how do you navigate through it? Here’s a couple of my suggestions. Number one, don’t be too aggressive with the timing of your investments. I personally had a few massive months in business last year from a sales perspective, and I was so excited about the rapid growth that I was achieving, that I couldn’t wait to invest it all back into my business to achieve even bigger and better results.

 

However, sometimes when you’re a little bit too aggressive with your investments, it can catch up with you rather quickly. So while it’s a great thing to keep investing in your business, it’s also a good idea to do it in a really mindful and considered way, always looking forward at the impact that this might have on your cash balance. Another suggestion that I’ve got, communicate openly with your suppliers. If you have perhaps over committed on the investment front, don’t leave it to the last minute to let them know that you might need to push back some projects.

 

This was definitely an area that I fell down in. I am such an optimist and because I was so sure that my business growth would continue even through the Christmas period, I didn’t let the suppliers I was working with know that there was a possibility I might need to delay the projects that I was working on. As a result, when the cashflow crunch hit, I left it to the very last minute to communicate to some of these suppliers that I might need to push our projects back.

 

That is a less than optimal on so many levels because it obviously inconveniences them. And to be honest, it caused me massive levels of stress and anxiety, because I was so worried about letting these people down. Anticipating that they might be expecting this cash to hit their bank accounts. Because I’m always looking forward to in my business, I had been forward forecasting my cashflow. I knew there was going to be a cashflow crunch at this particular time. And yet for some reason, rather than raise it early with suppliers, my optimism kept me thinking that I’d be bringing in more revenue and I’d be able to make these cash obligations. Even if I had been able to, I think it’s always a great idea to let any suppliers or people that you’re working with know as far in advance as possible that there may be a potential delay to the time that you want to commence projects or to your ability to pay your invoices on time.

 

If you do find yourself in a position where your cash is really tight, I recommend that you go to people that you’re working with and look to negotiate new payment terms. Can you request an extension on payment? Can you perhaps push out a payment date? Even if you feel like businesses around might not be able to accommodate this, it is definitely worth asking the question. So these are some suggestions for navigating through the cash crisis, but ultimately we would like to avoid getting in that position in the first place.

 

How to avoid a cashflow crisis

 

So how can you avoid this ever coming up in the first place? The first thing that I recommend is that you always stay right in the details of your numbers. Like I said, I knew months out that this was a possibility for this particular time of year. And for some reason, instead of fronting up, looking at the numbers and having those tough conversations, I tried the ostrich approach. I put my head in the sand and thought, “I’m going to manifest a whole bunch of money to land in my account before then so I don’t have to delay any of these expansive projects that I really want to work on.”

 

Unfortunately, the ostrich approach, when it comes to your finances is not the best approach. I really do suggest that you put your head into your numbers, get to know them, familiarize yourself with them and have those difficult conversations long ahead of time to avoid a last minute awkward conversation. And if you can see that there’s going to be a cash shortfall, why not look at ways of proactively generating additional revenue to cover that cash shortfall in advance? Is there something additional that you can launch through that period of time? Can you pull forward some of your revenue payments or launch of a program? There’s so many different ways that you can get creative when it comes to navigating through managing your cash bank balance.

 

Another suggestion that I have is come up with a strategy for how you might navigate through this period of time if, God forbid, it was ever to happen to you. I don’t have any credit facilities in the business, which is something that I deliberately chose to her. However, when this period of time came up, I really wished I had a short term option of how to navigate through this period of time. Yes, I have a personal savings account, but I wasn’t willing to dig into it for this period of time. So if you don’t have huge amounts of savings in your business, I really suggest that you proactively look forward and think, “If something was to happen, if something outside my control was to happen, how would I navigate through a period of time if cash did get tight?”

 

This has definitely been one of my biggest takeaways, and I’ll be looking to implement a buffer, either in the way of savings or in the way of some sort of credit facility, if this was to ever happen again. So to sum up today, a cashflow crisis can really suck, but it can happen to anyone. I am a qualified accountant and money management is my area of expertise. But even when you can identify that this might be happening in the future, sometimes you might feel a little bit powerless as to how to navigate through. A cashflow crisis can happen to anyone. If you do find your business in a cashflow crunch, some options of how you can navigate through.

 

Firstly, communicate openly with your suppliers. Secondly, negotiate new payment terms. And thirdly, even if your business is experiencing really rapid growth, don’t be too aggressive with the timing of your investments. You can preemptively avoid a cashflow crisis well in advance by really looking forward with your cashflow forecasting, and ensuring that you have a credit facility or a savings buffer to help get you through a period of time if you ever needed some short term cash support.

 

I hope today’s episode has highlighted for you the importance of money management, and how money struggles can happen for anyone at any stage in business. It’s nothing to be ashamed about, but it is something to plan for. Thank you so much for tuning in today. And I look forward to chatting to you guys again next week.

 

Thanks so much for listening. If you loved this episode, please share it with your audience. And don’t forget to tag me on Instagram at @Clare_Wood_Coach, and also make sure you hit subscribe so you never miss an episode. Have an abundant week and I look forward to talking to you again next week.

 

About your host

Hi, I’m Clare Wood – I’m a numbers geek, a travel lover, a reality tv addict, and a passionate business coach. I’m here to empower you to create an extraordinary business and an amazing life; because I believe you don’t have to choose between the two.

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