When something in the business isn't working, the natural instinct is to fix it, and fast. We see it with clients all the time, and we're guilty of it ourselves.
The fix usually sounds something like:
- "I need another team member."
- "I need more customers."
- "I need better software."
These are all solutions. The harder question is: what problem are they solving?
That was one of the big takeaways from our team's time at Revved this year. It's easy to jump straight to the answer before we've properly understood the question.
The problem underneath the problem
A few things we see often:
- A business with cash flow issues doesn't always have a revenue problem.
- A business owner working 60-hour weeks doesn't always have a workload problem.
- A fast-growing business doesn't always have a growth problem.
With a bit of digging, there's often a completely different issue sitting underneath. Here are four examples.
1. "We need more sales."
What was going on underneath: The business didn't know which customers were profitable.
Try this: List your top 20 clients and rank them by profitability, not revenue. The results can be surprising. Some of your biggest customers might be costing you the most.
2. "We need to hire someone."
What was going on underneath: Processes weren't documented, so work was being done inconsistently and twice over.
Try this: For one week, have the team write down every task they do. Then sit down together and flag anything that's slow, doubled up or causing a bottleneck. You may find the extra capacity you need is already there.
3. "We need a bigger overdraft."
What was going on underneath: Payment terms weren't clear, and nobody was keeping an eye on who owed what.
Try this: Make sure every client knows your payment terms, and put someone in charge of following up overdue invoices every week. (More on this one below.)
4. "We need a new job management system."
What was going on underneath: The team wasn't using the current system properly because there was no clear process or accountability around it.
Try this: Review your current system and list the features you're not using. Compare that to what the business needs. Then set a clear process, and test it for 30 days before spending money on something new.
In a nutshell
Before you spend money, change direction, hire or buy new tech, get clear on the problem you're trying to solve.
A solution is only as good as the diagnosis behind it. Otherwise it's a bit like treating a broken leg with a couple of paracetamol. It might take the edge off, but it won't fix anything.
One business problem worth solving
Each month we'll pick one common business problem, unpack what's often going on underneath, and share a few quick checks you can do yourself.
"My overdraft keeps getting bigger"
A business owner told us recently: "We've asked the bank to increase our overdraft because we're struggling to pay suppliers each month."
On the surface, that sounds like a funding problem. Often it isn't.
An overdraft is a short-term fix. So the question is: what is the overdraft solving? If we don't answer that, we'll likely be having the same conversation again in six months.
Sound familiar?
- Your overdraft sits near its limit most of the time
- Suppliers are getting paid later than usual
- GST and provisional tax payments cause stress
- Payroll weeks feel tight
- Revenue is growing, but cash never seems to build up
- You're checking the bank balance more than you'd like to admit
When you're time-poor, more funding can feel like the obvious answer. Sometimes it is. But often the issue is somewhere else.
Four common causes
1. Customers are paying too slowly
Plenty of businesses put a lot of energy into sales and very little into collecting the money.
Say your customers take 60 days to pay, but your suppliers want paying in 20. You're funding your customers for 40 days.
Quick check: Pull up your aged receivables in Xero. How much is sitting in invoices more than 30 days overdue? If you collected half of it, how much would that take off your overdraft?
2. Your gross margin has quietly slipped
This is one of the most common things we see. Costs have gone up, prices haven't kept pace, and while the business is busy and revenue looks healthy, there's less cash left from every sale.
Quick check: Compare your gross profit margin today to two years ago. If revenue is up but margin is down, more sales could be adding to the cash pressure, not easing it.
3. You're funding growth
Growth eats cash. More stock, more wages, more work in progress, more money owed to you. Lots of successful businesses feel the squeeze because they're growing faster than their working capital can keep up.
Quick check: If sales are up 20% on last year, has your overdraft grown by a similar amount? That points to a growth funding issue rather than an operational one, and the fix looks quite different.
4. Nobody is forecasting cash flow
Most business owners can tell us last month's profit. Far fewer can tell us what their bank balance will look like in three months. Without a forecast, every big payment feels like a surprise.
Quick check: Can you answer these today? What will your bank balance be in 30 days? In 60 days? In 90 days? If not, that's the place to start.
Before you call the bank
Set aside an hour and work through these four questions:
- Who owes us money, and how overdue are they?
- Has our gross profit margin changed in the last two years?
- Is growth using up cash faster than we're bringing it in?
- Do we have a 90-day cash flow forecast?
The answers usually point to what's going on.
The takeaway
A bigger overdraft can be a useful tool. It's rarely the root fix.
The businesses that manage cash flow well don't just focus on how much funding they have. They know where their cash is going, and why.
If any of this feels close to home, give us a call or flick us a message. A quick chat and a simple forecast can take a lot of pressure off.
About Revved
Revved is New Zealand's premier leadership summit, a full day of conversation with founders, CEOs and senior leaders from every sector. If you've been thinking about going next year, our advice is: do it.
If you'd like to sit down and look at where your business is at, whether that's a cashflow review, a pricing conversation, or a broader look at the year ahead, we'd love to hear from you.