Businesses face cash flow issues on a daily basis, these issues can cause everything from minor to severe problems depending on the size of the business and the size of the cash flow deficit. Financial issues work with businesses on a daily basis to identify cash flow issues within them and help provide a solution to their problems.
There are many reasons why a businesses face cash flow issues, these can include:
Negative cashflow due to providing extended payment terms to customers
When trading with customers, businesses quite often provide them with credit terms. This is often used to entice customers to use them as they can delay paying their debts which helps cashflow. Unfortunately this can have a negative effect on the business as often terms offered can range from 30 days to 120 days or more.
Business is unprofitable due to high costs and/or low profit margins
It is common to see businesses with costs that out way their income due to excessive expenditure. There are two main solutions to this problem, either cutting costs or increasing sales.
Decrease in Sales
When a company notices a decrease in sales it can have a negative effect on the cash flow. The decrease in sales can happen for many reasons and identifying them early is an important aspect to saving the business.
Decrease in profit margin
Unfortunately due to ever changing markets, exchange rates and competition, profit margins can be whittled away very easily and this might not be noticeable until cash flow issue arises. Identifying the decrease in profit margin early will help save a business.
Excessive debt & capital expenditure
It is regular that we see businesses with excessive debt and capital expenditure for the size of business. This commonly happens when issues arise within the business, identifying this early and trying to cut costs or refinance can stop the business going insolvent and rescue it going forward.
Excessive personal benefits and drawings by directors or shareholders
Many issues can arise when running a business and one of them that we see often is directors and/or shareholders taking excessive funds from the business to benefit them selves personally. This can have a negative effect on the business as when it comes to paying the creditors of the company, quite often the money is not available and this can cause the demise of the company.
Poor credit, stock and debtor management
When running a business you need to make sure you manage every aspect of the business. Unfortunately there are a few parts of the business that get over looked, these including Credit Control, Stock Management and Debtor Management. All of these can cause cash flow issues due to many reasons and finding out which one is your problem and rectifying it can provide a solution to future cash flow issues.