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The Secret Link Between Low Margins & Poor Cash Flow

Writer's picture: Claire HancottClaire Hancott
small business cash flow

Understanding the Critical Connection

Did you know there’s a clear correlation between low margins and poor cash flow? From years of experience working with businesses across various industries, we’ve observed this crucial link firsthand. Here’s what you need to know to address this common yet complex challenge.


Cash Flow: The Number One Issue

Cash flow is often cited as the top concern for businesses, whether you’re in transport, manufacturing, or any other industry. However, the real crux of the issue lies in operational cash flow—the funds needed to cover day-to-day expenses such as payroll, rent, and supplier payments.

Without sufficient cash flow, businesses risk falling into financial trouble, even if they’re generating revenue.


The Middleman Problem

Middleman businesses—like brokers, distributors, eCommerce platforms, and construction firms—are especially prone to cash flow challenges. These businesses operate between suppliers and customers, often with razor-thin margins, making it difficult to stay afloat.


Key Factors Worsening the Situation:

  1. High Overheads: Expenses like salaries, fuel, and stock costs dominate budgets.

  2. Unfavourable Payment Terms: Many businesses pay suppliers faster than they receive payment from customers.

  3. Low Margins: With single-digit profits, there’s little room for error or unexpected costs.


Strategies to Improve Margins and Cash Flow

If your business is grappling with low margins and cash flow issues, consider these two proven strategies:


1. Vertical Integration


What It Means: Vertical integration involves acquiring control over more stages of your supply chain, such as owning your suppliers or distributors.

Benefits:

  • Retain more of the margin within your business.

  • Gain greater control over supply and pricing.

Challenges:

  • Requires significant capital investment.

  • Demands new skills and, in some cases, licensing.

Example: A transport broker purchasing its own fleet of vehicles to eliminate subcontractor costs.


2. Horizontal Expansion


What It Means: Horizontal expansion focuses on selling additional products or services to your existing customer base.

Benefits:

  • Increases revenue with relatively low risk.

  • Leverages existing customer relationships.

Example: An accountancy firm offering HR services to its clients.


Where to Start


  1. Evaluate Your Margins: Are they competitive for your industry? If not, identify areas for improvement.

  2. Optimise Cash Flow: Audit your current operations to find cost efficiencies and streamline payment terms.

  3. Choose the Right Strategy: While horizontal expansion is lower risk, vertical integration can yield higher rewards for businesses ready to invest.


Transform Your Business


Improving cash flow and margins requires time, strategic planning, and bold decision-making. Whether it’s reshaping your supply chain or expanding your product offerings, focusing on these areas can lead to transformative results for your business.

Need help navigating these changes? Contact Profit Cash Growth for expert advice tailored to your unique business challenges.

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