The ability to generate cash is an important key to business success. Without strong and positive cash flow, companies will not prosper and grow. Insufficient cash flow is a symptom of the problem of business management.
It is known that poor cash flow management has ended even with large successful companies, which shows that cash flow problems can affect both small and large companies. In fact, these problems are responsible for causing the failure of more than 70% of companies in their first year.
If left without problems, cash flow problems can become the cause of business failure. Take a look at the main causes of cash flow problems in business. Knowing these risks will help you develop effective management and maintain a healthy Cash Flow Finance.
You have many debtors
Many companies nowadays offer credit to their clients so that their clients can deliver products and services immediately, even if they do not have cash available. Credit sales have a direct impact on your cash flow, especially when customers cannot pay them at the agreed time.
The fact that customers do not pay on time, especially when they owe a large amount, will make you lacking money. As a result, you may need to seek financing or other forms of timely payment of late payment. Even if credit can be obtained, this additional financing can result in substantial interest and commission payments.
One of the ways to avoid having a large number of debtors is to shorten your credit terms and impose this strictly. For example, if you are showing a credit of 60 to 90 days, reduce it to 15-30 days. It would also be useful to delegate a staff member to send emails and contact clients to collect their payments.
You have many creditors
Too many creditors may mean that your business has a large amount of debt to pay. This is particularly tragic for cash flow in cases where your company operates inefficiently, has very limited cash reserves and creditors already demand payment.
Late payments can accumulate quickly, making it difficult to pay your debts. Late payments can damage your relationships with creditors and can lead to other problems, such as reduced credit terms and premium rates.
Excessive financing of your business
Loaning large sums of money to finance your business requires additional fees, such as interest, and may require short payment terms. If you are not careful about increasing your loans, you can control your business.
The more you finance, the loan terms are often more severe, usually at a higher interest rate. Often, indebtedness only postpones the future cash flow crisis, which may be worse than the one it currently faces.
Overtrading is another reason for cash flow problems. Work in Overtrading is mainly practiced in small businesses where customers can buy through credit. This reduces the cash flow in which the money will be paid only at the agreed time.
The need to borrow more money to supplement existing funds is increased. Most entrepreneurs borrow to add to the funds with the idea that the interest on the borrowed money will be covered by the profits.
This is also a way to keep the business “alive”. Your ability to pay this debt depends on whether the creditors will pay you on time. Companies that do not pay on time will face the result of the closure.
It would be perfect if the customer always paid cash in advance when the sale was closed. However, many companies nowadays offer credit to their clients. By offering credit to customers, you may not have cash available until the due date of the payment.
As a result, you may need a loan just to continue normal operations. The increase in credit sales can lead to a greater need for indebtedness, a pattern that can be disastrous for cash flow.
When you have cash on hand, it can be tempting to buy assets such as office equipment, furniture or cars. Spending on these items can result in a lack of funds to finance daily operations and to cover any unexpected costs that may arise. It is wise and good practice to always have cash reserves ready for any emergency.
As trade through trade can cause a negative cash flow. Companies that have a lot of money to buy non-priority assets can tend. This, of course, can lead to a job failed because the available funds must be available to finance the daily operations and any unforeseen expenses associated with the purchased assets. Alternatively, assets, such as mechanisms and buildings, could be leased to provide more available funds.
Effective cash flow finance planning is crucial to avoid more problems. To address any cash flow problems you may have, you can also hire a business transformation specialist to help you plan and manage your money effectively. An intelligent businessman will understand the consequences of poor cash flow for his business and will ensure that his business is not overwhelmed by excessive debt that could eventually cause it to fail.