You have got the investment, set up the business, and made your market presence, but why aren’t you able to make money as a business? Making money as a business is a big step of the way business owners often fail to achieve. Without a strong cash flow, it is often difficult for a company to suffice.
Wondering what the cause of the business cash flow problem is? It could directly point at a management issue for your company. If your business is not generating a positive cash flow, you will surely not grow and flourish.
It does not matter whether you have a small business or large, the cash flow problems can cause severe damage to you as a business, and if the problem persists, you might even have to round up the business soon enough. Statistics say that around 70% of businesses close down in the first year due to cash flow problems.
Before the business cash flow problem becomes an issue and leads to the failure of your business as a whole, you should get into the root cause of it to solve it from the start. effective forecast planning and management strategy will help you to solve the problem.
1. Many Creditors
If you have too many creditors, it is a sign that people might have a large amount of debt to pay. If you have insufficient funds to operate your business, you might eventually end up in the hands of creditors. With limited funds and creditors requesting payments, you might be in a tight spot to pay them off.
Delaying payments isn’t a great idea either; it keeps accumulating quickly and making things even more difficult for you. Late payments might also spoil your rapport with the clients and make them even more agitated for their repayment. Business owners can also lead to issues such as reduced credit terms or premium rates.
2. Many Debtors
Many companies offer credit to clients to enable the clients to deliver the services or products without delay. The credit to clients without proper thought can lead to cash flow problems as the clients do not make cash available. There are situations when clients fail to make cash repayments against the credit taken in due time and can lead to cash flow problems for your company. If your clients delay the repayment of dues, it could also lead to problems.
If you owe large amounts to your clients and they delay the payments, it could lead to serious cash flow problems for you as a company. Also, when you have multiple debtors the amount of money that could come to you in cash from them is more, and if they fail to pay, you are in a bigger cash flow problem. The low cash flow will lead you to seek financial backing from creditors and put you in debt, in turn.
The high amounts of interest to pay and the commissions of repayments can lead you to go into larger debt. The best way you can avoid such a situation is by having shorter credit terms, and by implementing these terms among your debtors strictly. You could delegate an employee who will take care of these debts and ensure that emails are sent timely to the debtors for collections of the payments. Where you had credit terms of 60 to 90 days, you could reduce it to 15 to 30 days for quicker repayments and ensure that you have a positive cash flow.
3. Over Investment
When your company is doing good, and you have a positive cash flow, you might be tempted to spend the money by investing in assets. You might be tempted to purchase office equipment, furniture, or personal equipment as well. Overspending of such company funds can lead to a lack of funds for more important things. You might have a dearth of funds for things such as company expansions, operations, marketing costs, and other unexpected expenses.
As a business, you must have some reserve fund always to ensure that you do not have to beg, borrow, or steal for your company’s requirements. Trade through trade causes negative cash flow. If companies tend to buy non-priority funds, it might not be a very positive situation to be in when the company’s funds go low. You must spend management and operation expenses instead.
4. Financing Your Business Excessively
Over-financing of your business might not be a great idea either. You wish to start a business right, start small and grow. Trying to get everything right from the beginning might not be a great idea. You might end up spending a lot of money on setting up the business, taking loans and money from investors, but not be sure how much returns your company can get you. If you continue to increase your loans, you might not be able to come out of the debts. To take control of your business, you must keep track of the amount of loan or investment you require and move ahead accordingly. Over-financing might not be a great idea for businesses when you are starting a business.
Overtrading is another main reason for cash flow problems. Overtrading, especially in terms of small businesses might cause major cash flow problems. You will need to borrow funds to meet your company requirements. Many business owners borrow under the impression that they will be drawing the business profits soon enough and eventually be able to pay up. However, the case is not true for many situations, and that is where companies fail to clear the debts, have serious cash flow issues, and fail as a whole.
Sometimes these issues might lead to the closure of businesses as well. It is better to say away from such situations and make the best out of the funds that are already available to you. You can stay away from such situations to save your business. For this, ask the customers to pay in advance. Credit to clients might not be very positive for cash flow problems, and it is even worse when the clients fail to pay. Avoid such situations for your business to ensure that you stay strong in terms of business.
The cash flow issue, already mentioned, is a huge problem when it comes to businesses. Understanding the business and knowing what is causing such cash flow problems is a way to stay away from it. Also, you need to set your management such that you can have your cash flows aligned. You need to be strict with the terms and conditions of credit given to the clients and enforce them when the time comes. Have a positive cash flow and make sure that you do not have to borrow when there is a requirement for your company. You do not need to wait for someone to pay you for your company’s requirements.