5 - The Hidden Drain Uncovering Inefficient Cash Flow
A series about business efficiency, finding profit and how to get there
Introduction
Cash flow problems rarely announce themselves with fireworks. They creep up slowly - a few late invoices here, a creeping overdraft there. Suddenly, you're wondering why a “profitable” business feels constantly strapped for cash.
The truth is, many SMEs don’t have income problems, they have timing problems. They’re profitable on paper, but their cash flow leaks like a sieve. And unlike profitability, cash is oxygen. If it runs out, the whole business can suffocate - fast.
In uncertain economic conditions, efficient cash flow is the quiet hero of sustainability. And often, the profit you’re looking for is not missing, it’s just stuck in slow payments, bloated inventory, or poor internal habits.
Let’s go hunting.
Actions to Be Taken
Uncovering inefficient cash flow begins with investigation and then strategic action.
Map Your Cash Flow Lifecycle
Start with this question - How long does a dollar take to move from sale to bank account?
Break it down -
When do you incur costs (staff, materials, logistics)?
When do you invoice?
When do you actually get paid?
What’s the average lag?
Benchmark Your Debtor Days
Calculate your Debtor Days (Accounts Receivable ÷ Total Sales × 365). If you’re regularly over 30–45 days, there’s work to do. Every day you’re not paid is a free loan to your customers.
Review Your Payment Terms and Enforce Them
Too many SMEs offer generous payment terms out of fear. Shift to 7 or 14-day terms where possible and enforce them. Automate reminders. Introduce late fees if culturally appropriate.
Invoice Immediately - Not Weekly or Monthly
One of the biggest cash flow delays is self-inflicted. Invoice as soon as work is complete. Make this a non-negotiable habit.
Tighten Inventory and Work-in-Progress (WIP)
Stock sitting on shelves is money tied up. So is half-finished work. Reduce over-ordering and create checkpoints to get WIP completed faster.
Negotiate Better Supplier Terms
You don’t just need customers to pay faster - sometimes you need more time to pay. Ask for 30 or 45-day terms from your suppliers. Many are more flexible than you think.
Review All Recurring Outgoings
Subscriptions, licences, service fees - they add up. Audit monthly for items you no longer use or could consolidate.
Psychological Perspective
Cash flow is often treated as “just accounting stuff,” but it’s deeply tied to emotion - especially fear, avoidance, and shame.
Many SME owners avoid looking closely at cash flow because it feels too raw, too revealing. They don’t want to confront where money is leaking, or why they haven’t chased that invoice from a loyal customer.
But clarity breeds confidence. When you face cash flow head-on, it shifts your mindset from reactive to proactive. You stop waiting for the bank balance to recover. You start making it happen.
And when cash flow is healthy, you feel lighter. Decision-making is easier, stress is reduced and planning becomes possible again.
HR Best Practice
Cash flow isn’t just a finance issue, it impacts your whole team. Late payroll, frozen training budgets, withheld bonuses they all erode trust.
HR’s role is to
Support clear communication during cash-tight periods
Involve relevant staff in improving billing or WIP processes
Reinforce the importance of financial literacy across teams
Make efficiency a shared responsibility, not a finance-only issue
Also don’t withhold financial insights from your leadership team. They can’t help fix what they don’t understand.
Red Flags to Watch For and Mitigate Against
Watch for these common signals of inefficient or unhealthy cash flow -
Invoices being sent late or inconsistently
High accounts receivable with no structured follow-up
Discounts offered simply to get paid faster
Unpaid superannuation or PAYE falling behind
Owner “top-ups” becoming routine (personal loans into the business)
Increasing reliance on credit cards or overdrafts
Cash flow spreadsheet last updated six weeks ago
Each one of these is a drain, but also a clue.
Narrative Story Meet Amar from Dunedin
Amar runs a boutique print and packaging business in Dunedin. Business was steady, but cash was always tight. He chalked it up to seasonal slowdowns and rising costs.
Eventually, his advisor insisted they map the cash flow cycle. What they discovered -
He was paying suppliers within 14 days but only invoicing clients on the 30th of the month
Average payment time from clients was 47 days
He had over $25,000 tied up in unbilled work sitting in a production backlog
Amar made three key changes -
Moved to 14-day client terms with automated reminders
Set a KPI for his production team no job sits unbilled for more than 48 hours
Negotiated 30-day terms with his key paper supplier
The result? Within two months, his bank balance was healthier than it had been in over a year and he stopped dipping into his personal savings to cover payroll.
His words? “For the first time in years, I’m not just chasing jobs - I’m managing money. It’s a whole new kind of control.”
Golden Nugget – “Profit without cash flow is fiction and fiction doesn’t pay the bills.”
If you’d like a confidential, free of charge, free of obligation conversation about your business, here’s how to get me.
📞 Phone +64 275 665 682
✉️ Email john.luxton@regenerationhq.co.nz
🌐 Contact Form www.regenerationhq.co.nz/contact
If you’d like to read more RegenerationHQ thinking on SME business and other things, go here – www.regenerationhq.co.nz/articlesoverview
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