Understanding Cash Flow Problems

Cash flow problems put your company at risk.

Unless your company manages cash flow effectively and uses regular cash flow forecasts, it is in jeopardy. Cash flow shortfalls mean:

  • You can’t pay suppliers on time
  • You can’t make debt repayments on time or at all
  • You can’t buy new inventory to meet customer demand
  • You can’t pay staff wages
  • You can’t compete for new contracts
  • You can’t advertise to attract new clients
  • You can’t hire new staff.

Causes of Cash Flow Problems

Conditions that can impact your cash flow include:

  1. A fall in sales or a decline in gross profit margins. This could be a result of changing economic conditions (such as the most recent global pandemic), increased competition, or a drop in demand for your product or service.
  2. An unprofitable business model
  3. Using a negative cash flow business model. You offer customers or clients credit terms of anywhere from 30 days to 90 days (or longer).
  4. Having excessive debt
  5. Having inadequate stock or credit and debtor management.

Your cash flow problems can be due to any of the following:

  • Late paying customers: When a customer doesn’t pay on time, your business can experience cash shortfalls.
  • Poor debt collection processes: Not issuing or chasing up invoices in a timely fashion can result in reduced cash flow.
  • Low prices: If your prices are too low, but your expenses are rising, your company is almost certain to experience cash flow problems.
  • Low sales Too often business owners try to resolve poor sales by looking for new clients. But this incurs more costs in areas like advertising and marketing to attract those new clients.
  • Too generous payment terms: Allowing customers to pay in arrears for goods or services received is a bit like giving those companies short-term, interest-free unsecured loans.
  • Overtrading: Rapid growth means your company will have to invest in more stock, equipment, or hiring staff to meet demand. If you don’t have sufficient working capital, the company will experience cash flow problems.
  • Too much stock: Every dollar you have in inventory is a dollar you don’t have in cash.
  • Too much debt: If you’re overleveraged (when you’ve borrowed too much and can’t pay interest payments or principal repayments or meet operating expenses), you’re likely to experience cash flow problems.
  • Cash Management: Cash is vital to your business. Without it, your business won’t be able to pay suppliers and creditors and to meet its payroll obligations.

Finding and fixing the cause of your cash flow problems in your business and putting systems in place to manage cash effectively is vital for your company’s survival.  Fortunately, most cash flow problems can be resolved with help from the right people. They will help you to identify the causes of cash flow problems in your business and advise the best way to fix them.

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