From my experience working with small businesses over the last two decades as a professional qualified chartered certified accountant turned cash flow expert, many businesses based in the UK fail due to underlying cash flow issues.
Infact 82% of UK business failures are directly linked to cash flow problems?
It’s a silent killer, and it could be lurking in your business right now. Brenda was an ambitious entrepreneur just like you, but hidden cash flow mistakes almost destroyed her dream. Let’s explore her story
Today, I’m going to share Brenda’s story with you.
One of the biggest reasons for poor management or understanding leading to business failure is not building a solid cash flow foundation.
Cash flow is the fuel in the engine of your business – and like any engine, ignoring it will lead to a sudden and catastrophic breakdown. That’s why staying in the game of business depends on consistent, positive cash flow.
Here’s what I believe.
THE NAME OF THE GAME IS TO STAY IN THE GAME UNTIL YOU WIN THE GAME…
How do you stay in the game of business?
By having consistent positive cash flow to support your business operations.
I am going to share with you a classic case of cash flow mistakes: not building a solid cash flow foundation leads to serious cash flow problems.
Meet Brenda: Ambitious Entrepreneur, Hidden Cash Flow Crisis
Meet Brenda
Meet Brenda, an ambitious e-commerce founder who sells bespoke women’s clothes in Kings Road, Chelsea.
She has found an unfulfilled gap in the market, and people are buying into what started as a woman band.
Her accounts for 1st year reveal that she made a revenue of £157,250k and made a profit of £26,325.
Brenda’s Opportunity & Growth
Brenda Seizes the Moment
Now she sees a big opportunity to scale the business.
She buys more inventory as there is a lot of demand for what she sells. She also brings more people on board to help her with the growth. Her team has grown from 3 to 7 people, which strains wages and salaries payments.
Investments and Challenges
Her investments are working and her business is growing. She feels like this is her time.
The inventory she is buying is affecting her cash situation because a lot of her cash is tied up in stocks. But she continues to march on and stay focused on sales because she is convinced profit is the automatic result of the ability to make and sell.
Flexible Payments for Customers
To sell more, she is allowing customers flexible payment terms through Klarna. This is great for them as they can spread the costs over a few months.
Brenda looks at her company’s Profit and loss statement in QuickBooks Online accounting software. Sales are increasing, and business is booming. She feels great when looking at her business’s profits, too. She believes finance is in good shape.
How Brenda Falls Into a Trap?
The Hidden Problem
Despite all this growth, there is a problem.
The problem is, that Brenda is trapped in a poor cash flow management cycle, like many other entrepreneurs and small business owners.
Her cash is not only tied up in inventories but also in receivables. (money owed by customers who haven’t yet paid their invoices).
The Cash Flow Gap
This means there is a gap between her current assets regarding cash requirements to make payments to suppliers and other creditors.
Now, she is in the dangerous territory of not having enough cash flow to pay salaries , main suppliers’ bills (who provide finished clothes stock items) and other financial obligations like rent and monthly overdraft facility fees.
VAT: The Unexpected Expense
As she crossed the VAT threshold of £85,000, she had to start and sustain paying VAT, and she didn’t have enough liquidity to cover this unforeseen expense. Her business is struggling to sustain VAT cash outflows and the unpaid VAT debt is piling up quarter by quarter.
Ignoring the Warning Signs
Business is already showing signs of these future problems, but she does not know the effect these will have in the long run, and continue to focus on growing sales.
Cash Inflow Slows Down
Cash inflow doesn’t happen as expected, as there is a seasonal dip in sales. So, less cash comes in from new clients, and as a result, there is an increasing gap between cash inflow and outflow month by month.
The Initial Impact
In the first month when this issue appeared, there was only a difference of £29,529.32 in negative cash outflow. She has been growing her business for a while so that she can swallow negative cash flow, for a month. She has an overdraft facility of £50,000 to use if needed.
The Problem Worsens
The problem is that the cash outflow continues to be way bigger than every month’s cash inflow. It’s not because the business is not profitable. The business is profitable, but not as profitable as earlier because the costs of fulfilment have gone up, despite sales being the same. Which means profit margins have dropped.
As a consequence, cash coming in is much less than the cash going out.
Brenda’s Breaking Point: “I Can’t Run This Business
What will the Future Be Like for Brenda?
Despair and Panic
Just six months from now, a once-hopeful Brenda stares in disbelief at her bank statement. The cash reserves that seemed so reassuring are now shockingly low, and she’ll be unable to maintain working capital. She’ll be impatiently saying to herself, “I can’t run this business anymore.”
And then asking herself “What’s impacting our cash flow negatively this quarter, and how can we address it?”
If she is not careful, in extreme cases, continued cash flow mismanagement can lead to her company into insolvency. (unable to pay debs)
Empty Shelves, Empty Bank Account
No New Inventory, No Sales
Her vendors will not ship more goods until she clears their invoices. With empty shelves and no new stock, Brenda will watch helplessly as potential sales vanish.
As a consequence, fewer customer payments will be received in the coming months.
Stockpiles Lose Value
This means that the product will not move as fast and will just sit and gather dust in her warehouse losing its value day by day and costing to store the goods.
Clearance Sale: Losing Money to Stay Afloat
Desperate Measures
Her accountant will tell her to get rid of the stocks to be able to ease the cash flow situation to pay salaries, and keep the business going.
A Downward Spiral
Month after month, the cash outflow increases—£30,000, then £35,000, then even more. Each time Brenda thinks it can’t get worse, it does. The dream she worked so hard to build will crumble before her eyes, and there won’t be enough money to pay staff… or even herself.
The Cost of the clearance Sale
To get rid of the stocks, she will have to sell them at the below cost. Under normal circumstances, you buy low and sell high; that’s how you profit. So, Brenda earlier was buying for £60, that’s her cost, and retailing it for £100, her sales price.
So, to clear her stocks quickly, Brenda will have to sell at £40, which is lower than her cost price of £60. She makes a loss on every sale, but she won’t be able to avoid it because her business survival will be at stake if she does not get the much-needed cash.
Profit Takes a Hit
Because she will be selling for £40, what she bought for £60 will mean £20 goes back into the profit and loss as a cost of sales, decreasing the profit.
Suddenly, she will find the cash evaporating and profit decreasing day by day.
No Way Out
Banks Say No
Because of this, no bank will be interested in offering Brenda a loan or other funding because banks don’t care about the top line, i.e. sales. They only care about the bottom line, i.e. profit. They look at the borrower’s ability to repay before granting a loan, and they don’t want to lend to a business with rapidly declining profits.
Investors Demand Control
Same for an investor.
Before investing in a business, they look at the multiples of profit before interest and tax, as the business valuation is often based on the number of times of profit, which varies from sector to sector.
If the business is making less profit, they will want a big equity stake in the business in return for a small investment and for taking a big risk.
Brenda’s Dilemma
In a situation like this, Brenda will face a dilemma – whether to give more equity in her business to survive or just have a go herself to see what happens.
The Path to Salvation
Could Brenda Avoid This?
So, Brenda will likely be there in less than a year if she continues with her current ways and gets trapped in the poor cash flow management cycle.
Here’s the thing.
She doesn’t have to go through this story. Brenda can rectify this situation and avoid it today.
Cash Flow Mastery
All she has to do is become a financially savvy entrepreneur and master cash flow by gaining real-time insights into how cash flows in her business. Learn how cash flows in the business from when sales are made to her bank account.
And understand the answer to the big question:
“How to maximise cash flow better to scale the business steadily but sensibly?
The Importance of Scaling Strategically
When you’re scaling the business, you don’t know what it’s like to have a £180k business when you are currently doing a £90k revenue business because you’ve not been on the other side.
When scaling the business, ensure you have enough cash to run daily.
How you manage that is so crucial. Once you know how to manage that, we have to make an investment; otherwise, we will not grow.
If you prefer to watch the video of Brenda falling into a cash flow trap , here’s the link to the video.
How to Avoid a bleak future like Brenda?
Brenda’s story is a stark reminder that without careful management, cash flow can cripple even the most promising businesses. Her path leads to dwindling profits, desperate measures, and the very real threat of closure. But there’s another way… a path taken by entrepreneurs like Heather. Despite similar challenges, Heather’s business flourishes because she understands the secrets of cash flow mastery. She’s built a sustainable, thriving enterprise – and you can too.
Are you ready to learn how?
Call to Action:
Discover Heather’s success story and transform your own cash flow journey – Read Part Two Here!
Your Next Step: Solving your immediate cash flow issues
Could a cash flow management service be the solution to preventing a similar fate to Brenda’s?
If you are looking for an immediate solution to solve your current cash flow issues, you can book a call . I will give you actionable, practical advice to implement to improve your cash position.
Let me show you how to make cash management as a overall strategic management solution for your business.
Don’t wait until it’s too late – book a call today to safeguard your business
Testimonial
Shishir and his team have instrumental to solving our cash flow issues when our business was growing quickly. We were cash hungry and after 18 months, Shishir managed to fix lot of cash flow bottlenecks and as a result increased by cash balance by 37% in 6 months. – Dr Samit Chitre , Denmead Dental Practice Portsmouth UK
