According to a study by Santander Corporate & Commercial, almost one in six small businesses in the UK are “very” concerned about managing cash flow effectively over the next 12 months, with a further 27 per cent feeling “quite” concerned.
Some 46 per cent of businesses report being hit by at least one recent cash flow setback – with late or failed payments from customers (24 per cent), weak sales (eight per cent) and unexpected costs and charges (seven per cent) being the top three reasons for cash flow issues.
There is a widespread awareness of the immense effort required to own and manage a small business. Cash and cash flow should and will always take precedence for small company owners.
However, there is one area which could help bosses manage their cash effectively – the assets of a small business. Assets have a direct (but not easily recognisable) impact on cash and cash flow.
Sales growth can sometimes impact cash flow
Herbert Woodward, in his article Management Strategies for Small Companies on Harvard Business Review, suggests small businesses have a strong focus on revenue recognition via sales growth.
Whilst sales growth is commonly seen as the solution to all problems, there is less awareness that, except in the short run, there is no such thing as a fixed overhead.
Small firms quite often rely on the concept of marginal income accounting, bring out additional products or focus on geographical expansion, believing that overhead will not be affected.
The gap (in recognising revenue via sales growth) ensures sometimes cost of sales don’t scale linearly; sometimes the cost of sales can be exponential, especially for small-scale businesses selling physical assets. Regional expansion and the sales resources required for additional sales quite often require new and fixed investment.
Revenue growth is best targeted after getting a deeper view of sales volume by product/service, profitability by product line or region, and gross margins for different product lines.
For example, if you are based in York and provide hydraulic components in the North East and North West, if you plan to grow your business in the South East (from York) then travel, sales and shipping costs will be higher. As a result, your cost of sales for the South East will be greater compared to your cost of sales for the North West and North East.
Often the cost of sales is linear at scale but at the growth stage, it tends to be exponential.
Read on to unlock two cash flow opportunities