The Cash Trap: Why Business Struggle with Cash

This is one aspect that causes much concern to entrepreneurs. I have seen them putting in extraordinary efforts to win new business, execute it and make it profitable. And yet here is the uncomfortable truth which many miss: Being profitable does not equal being cash rich.

Smaller and medium sized companies tend to not regularly monitor the cash situation. And much like Murphy’s law, the bad news shows up when you are least expecting it. An entrepreneur wants to make an urgent business payment, only to be told by the accountant: “There’s not enough cash in the bank”.

This is often accompanied by a panic reaction which gives rise to a flurry of urgent actions to bolster the cash situation. If you have faced this situation in your business, I want to reassure you that it is far more common than most entrepreneurs realise.

However, there are steps that we can take to overcome this and make the cash position stable, predictable and efficient. This is what I would like to discuss with you now.

Timely Invoicing

As simple as this may sound, I have seen many companies defaulting on this. Delays in invoicing are like giving your customer extra credit period to pay you what they owe you. It ends up creating unnecessary pressure on the working capital position.

It is therefore a must that every company puts in place an efficient mechanism which clearly defines ownership and establishes clear invoicing triggers. It must ensure that as soon as a payment milestone is met, the necessary invoicing is done without any delay.

This helps us to ensure that payment is received from the customer before the credit period ends.

Recovery from Clients

One of the reasons I have seen recoveries from clients towards accounts receivable not happening as well as they should is because of the poor quality of follow up. Very often, follow up tends to be irregular and intermittent.

The one mantra which will help you enormously to deal effectively with this is consistent, disciplined follow up.

In a multinational company where I was a Finance Director, we had to chase around 40,000+ invoices relating to about 10,000+ clients and our annual recovery target was EUR 100 million.

We could achieve this target because we focused on regular follow up. To achieve this, we implemented a good accounts receivable management software, enlisted the assistance of a recovery agency, sent “pre-legal” intimations to defaulters and depending upon the case, but only as a last resort – sent the legal notice.

While smaller businesses may not have the scale or systems of large multinationals, the principle of structured, persistent follow-up applies equally — regardless of size.

Regular Monitoring

Cash monitoring is most effective when it is done regularly and not sporadically as an “as-needed, one-off” exercise.

In another multinational company I worked for, the head office (HO) expected us to send a simple cash position statement daily showing the opening balance, summary totals of receipts and payments on that day and finally the closing balance.

In case there were any major movements, we needed to write an explanatory line or two. This ensured two things – (a) there was visibility of the cash position and (b) there were no surprises which went unnoticed.

Similarly, we also needed to send HO the top 10 receivables with management comments about the recovery status on a weekly basis. This gave a good understanding of any possible write-offs which may eventually hit the company’s bottom line.

I have often seen companies having detailed monthly reviews, but in my view, they need to be supplemented with more frequent daily or weekly monitoring, so that any concerns get flagged timely and necessary actions can be taken promptly.

Timely Accounting

I have observed that many a time, not enough attention is paid to whether a short payment from a client is due to a delivery issue or on account of tax deducted at source (TDS).

It takes just a phone call to the client’s accountant or going through the company’s Form 26AS – a form on the Income-tax department’s website which lists the taxes deducted by all the companies from payments made in a financial year.

If such TDS is not accounted, taking credit for it in the Company’s income-tax return may also be missed leading to additional cash outflows towards taxes.

When accounting clarity is missing, management decisions are made on the basis of incomplete information. This can quietly compound cash stress over time.

Closing Thoughts

As you can see, what we have discussed above is not rocket science. And yet, many companies don’t end up doing what’s required on a regular basis.

It requires persistence, discipline and diligence, but the effort is more than worth it. Businesses often run into trouble because they lack visibility and discipline over cash.

The moment cash becomes predictable, decisions become calmer, leadership becomes stronger, and the business starts moving from survival to sustainability.