What are the disadvantages of improving cash flow?
How focusing on cash flow can damage your business
When I first saw this question, I thought there surely can’t be any disadvantages to improving cash flow. But then I thought about the question for a while and came up with a few thoughts, which are in this article. So what are the disadvantages of improving cash flow? Let’s take a look…
What are the disadvantages of improving cash flow:
- Reputational damage.
- Cash focused businesses tend to be less successful.
- The potential to alienate loyal customers.
- Improved cash flow can be costly for example invoice factoring.
- Loss of profit margins if the only focus is on cash flow.
- The wrong customer focus can cost more in advertising.
Let’s now take a look at each of these disadvantages of improving cash flow in more detail:
1. Your business can suffer reputational damage if it’s only focus is on cash flow rather than a customer focused approach
It’s always very important for a business to be customer focused. If customers are only seen as ‘cash‘, then this may not be the best impression you could make on them.
“Good customer service costs less than bad customer service.”
Sally Gronow
Whilst cash flow is very important for the survival of a business, this should not be the only focus. It’s about striking a balance. But what is important is to set out expectations at the start of the relationship with customers. Customers are far less upset if they know in advance what is expected of them.
You are always going to get those customers who will push the boundaries. The customer who doesn’t want to pay, or can’t pay. But on the whole most customers are happy to follow the rules.
But if your are having cash flow problems and change your customer receivables, expect some fall out with your customers. But if you wok with people, rather than against them, you’ll suffer less on reputational damage.
This leads very nicely onto my next point…
2. Businesses that are not just about the money, and more about providing good service, tend to be more successful…and the cash will follow
If you work on the basis that your profits, and ultimately the cash flow that should flow from those profits, represents the applause you get from taking care of your customers, you should have a successful business operation.
I would even take this a step further. You should also create a motivating environment for your employees too. This is because motivated employees who are happy in their work are more likely to want to help and please your customers.
The disadvantage of purely focusing on the cash, rather than on helping people (i.e. your customers) is that it’s not something you can drive to improve.
Whereas if your focus is on delighting your customers instead, you can find more and more ways to improve how this is done. Give your customers a great experience so they leave with a good feeling.
“I’ve learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel.”
Maya Angelou
3. You have the potential to alienate loyal customers if you badger them too hard for cash
It’s always good practice to improve cash flow and to collect accounts receivables on a timely basis. However, you have to be careful you don’t alienate your customers by how you approach the collection on money owed.
It’s always recommended to think carefully about your best accounts receivable policy at the outset. So when customers come to you they know from the outset what to expect.
If you need to change your payment terms this can alienate them from your business. So be careful how you approach this.
4. Improving cash flow can be costly for example using invoice factoring
Your reason for needing to improve your cash flow may be due to a cash flow shortage. However, some of the solutions to deal with a cash flow shortage may be quite costly. This includes invoice discounting or factoring, which will cost a business in a number of ways.
What are the costs associated with invoice factoring?
- Your business will pay a factoring fee on all sales.
- You’ll pay interest on the money the business is advanced on accounts receivable.
But in addition to the actual costs associated with factoring, many businesses don’t realise how factoring can sometimes upset your customers. It can also give the impression your business is in trouble.
5. You may sell products at lower profit margins or at a loss if the only focus is on cash flow
There’s nothing wrong in focusing on cash flow if you business is experiencing a bit of a cash flow crisis. However, you have to recognise by focusing on cash flow alone could have the disadvantage of reducing profit margins.
Many shops and other businesses run end of season sales. Sales are good for clearing-down out of date stock and to generate some cash. But in the long run this can damage your business and reduce profit margins.
If your business becomes too predictable and runs regular ‘sales‘, you may find your customers wait for the ‘sale‘ before they place any orders. This will lead to more customers buying your products at the lower price than at the higher pre-sale price.
6. Focusing on customers and their advocacy to your business may result in a lower spend on adverts
One of the best way and cheapest ways to obtain customers is by referral from another very happy customer.
The more customers that are happy with your service, the more that will be referred. This in turn will reduce your need to spend on expensive advertising, as customer referral is essentially free marketing.
“The more advocates you have, the fewer ads you have to buy.”
Dharmesh Shah
The opposite is if your only focus is on improving cash flow. If it is you may miss out on where your true focus should be. Which in turn will hit the bottom line profits.
But let me leave you with this lovely quote to read once more:
“I’ve learned that people will forget what you said, people will forget what you did, but people will never forget how you made them feel.”
Maya Angelou
You may also like to read “what are the benefits of using cash flow forecasting?”
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