Every cash crunch is either a timing problem or a structural one, and the fix for one does nothing for the other. Here is how to tell which you have.
Before you change a single payment term, you need to know which kind of cash crunch you have. The fix for one does nothing for the other, and getting this wrong is the most expensive mistake an owner can make.
Timing: the model works, the cash arrives late
A timing problem means the business is fundamentally sound. Projects make money. The cash just shows up after you have already paid for the work. Typical causes are unfavorable payment terms, slow billing, slow collections, and a mismatch between when your costs go out and when your clients pay.
Timing problems are fixable with the levers we will cover over the next three weeks.
Structural: something underneath is broken
A structural problem means the business model itself is not producing enough cash. Pricing is too low, costs are too high, or the model is not viable at the current scale. No payment terms adjustment fixes that. It needs pricing work or cost work.
The costly mistake
The fatal error is treating a structural problem with a timing fix. Taking out a loan or factoring receivables to cover a hole that profit should be filling does not solve anything. It adds interest to the problem.
More revenue will not fix a structural problem. It will make you run out of cash faster.
Two structural traps to watch for
- Growing broke: hiring crews and taking on bigger projects ahead of the revenue to pay for them, so growth itself consumes cash faster than it generates it.
- Client concentration: one client or one project makes up 40 percent or more of revenue, they pay late, and you are in crisis overnight.
Three questions to find out which one you have
- Are your projects actually profitable once you load in the true costs?
- Is the crunch a once-a-quarter dip, or a permanent low tide?
- Would more revenue at your current margins fix this, or deepen the hole?
If your answers point to timing, you are in good shape, because timing is the easier problem to solve. If they point to structural, that is worth knowing now rather than after another year of chasing cash.
Which one is it for you? If you are not sure, the three questions above are where I would start, and you are welcome to reach out through the contact page if you want a second set of eyes on the numbers.