DEAL OR NO DEAL AND THE END OF CASH FLOW MISERY! 

Do you offer discounted deals just to acquire customers? If so, please stop doing that immediately. The reason for that is that low priced contracts or offerings many times results in low profits and in the end negative operational cash flows, even if you succeed in acquiring the customer.
 

I would like to call this act of conduct for “the cash flow misery paradox”. Your purpose is to get profitable customers, so to become interesting as a partner you lower you prices or offer attractive terms to get them instead of the competitors, wich in turn results in a stream of low margin deals and negative cash flow. Results that you didn´t have in mind in the first place.

Once you have attracted customers by low prices or attractive terms that are bad for your business in the long run, it is very hard to get them to buy from you again under regular terms and prices. You´ll probably want be able to renegotiate the contracts to satisfactory and profitable levels. That will seldom happen since the customer chose your company as a partner because of the lower prices in the first place. The customer will sooner or later switch to a cheaper supplier.

The low pricing strategy is successful only when your product/services have few or no competitive advantages, or where economies of scale are achievable with higher production volumes and your company intends to dominate that segment. Otherwise it is financially a very unprofitable strategy and can put your positive cash flow and the company on jeopardy, something you can avoid and be without.

 

HOW IS YOUR CASH FLOW DOING?

Every now and then I get to study and analyze a company´s financial situation and I get surprised by unhealthy cash flow statements. Figures that sooner or later leads to severe financial problems and in worst case to bankruptcy.

Many of these cash flow problems could have been avoided if only the management team had paid more attention to important signs in their company´s statement on a regular basis, or were more responsive to their controller teams.

A company may experience operating cash flow problems, with negative cash flows, in many different situations. The three most common are when cash from sales get trapped on the balance sheet and build up a negative cash flow during a period of time. That happens when customers delay payments, resulting in a build-up of receivables. The second situation is when inventory rise to inappropriate levels because the product(s) is not selling or is being returned. The third reason is when a company is not applying a firm cash management and controlling system to detect negative cash flow build-up in time.

During expansion and growth you might experience negative cash flows, wish could be alright if you have a grip of it and it doesn´t last for too long, since the expansion is a kind of investment for the future.

If you want to decrease the financial worries in your company and sleep tight at night, and if you would like to attract investors to invest in your company, you need to strengthen your cash flow statement. The sooner the better.