What Are The Causes Of Cash Flow Problems?
Cash flow is the money that is moving in and out of your business. What happens when your cash flow becomes negative rather than positive? What are some of the main causes of cash flow problems?
- Low profits, down turn in revenue: If their is a shortage of money coming in, yet your outgoings are still due (eg. rent payments, staff wages, stock etc) then you are going to experience a cash flow problem.
- Purchasing too much stock: What happens when you over commit and purchase too much stock? This ties up cash, because you are not making up for costs plus there is the risk you won’t sell it at all.
- Allowing customers too much credit: Allowing customers too much credit can put you in a vulnerable position as you keep outlaying costs to complete the work yet are not getting any income to fund new or existing orders.
- Overtrading: Over extending yourself and taking on more orders than you have capacity to fulfil is a common cause for cash flow problems.
- Seasonal demand: Change in season which is unforeseen can affect a businesses cash flow. For example purchasing summer stock and experiencing a cold peak.
- Bad debt: Bad debt can be a vicious cycle, you may take on new sales but your looming debt repayments still need to be paid, making it hard to get ahead.
- Slow paying Accounts: As mentioned above with allowing customers too much credit, the same thing can be said for slow paying customers. If you are doing a job for a customer then waiting 30-60 + days for the invoice to be paid plus new orders are continuing to come in, you may find your self in a cash flow crunch. Waiting for invoices to be paid can be a risky waiting game.
- Increase in expenses: In any business there are changes in expenses, perhaps you had to take on an extra employee, or maybe if you’re a transport company and pertol prices have hiked you feel the pinch. You may not have the extra cash on hand to cover these costs and fuel the business.
- Sudden or rapid growth: This is a big one, rapid growth sounds like a positive direction to be going in right? It is if you have the capital to fund new orders! If you are taking on customers while still waiting for payments from others you may find your self in a cash flow pickle
- Under capitalised: You have all heard the saying ‘Cash is King’ Without it, you cant grow your business or keep it running.
So what is a good solution for cash flow problems?
When you have a cash flow problem there are a few options available to you. Those may include personal equity, selling shares, a bank overdraft, selling out of the business or Debtor Finance. If you scale back these options, the two most viable would be an Overdraft and Debtor Finance, both are short term finance solutions. It’s hard to know which one is more suitable to you, your business and your cash flow needs. For a detailed look into Debtor Finance VS a Bank Overdraft, you can download our white paper HERE. In this White Paper we define what both types of finance are and compare them, helping you decide which is the best option for you.