The 5 Main Causes Of Cash Flow Problems

The ability to generate cash is an important key to business success. Without strong, positive cash flow a business will never thrive and grow. Inadequate cash flow is a symptom of a management problem in a business. Poor cash flow management is known to have placed an end to even successful large businesses, proof that cash flow problems may plague small and large businesses alike. In fact, cash flow problems are responsible for causing over 70% of businesses to fail within their first year. If left unsolved, cash flow problems can become the reason for a business to fail.

Evidence of cash flow problems include the delay of wages paid to staff members, suppliers’ invoices are paid past the due date, unpaid taxes and employee superannuation, and direct debts and cheques dishonoured. If these problems sound familiar to you and your business, it is time for you to take immediate action to address your cash flow problems.

In this article, we take a look at the 5 main causes of cash flow problems in a business. Knowing these dangers will help you develop effective cash flow management and maintain a healthy business cash flow.

1. You have too many debtors

Many businesses today offer credit to their customers so that their clients can take immediate delivery of products and services, even if they don’t have cash on hand. Selling on credit directly impacts your cash flow, especially when customers are unable to pay you at the agreed time. Failure of customers to pay on time, especially when they owe a large amount, will leave you short of cash. As a result, you may need to urgently seek finance or other ways to recompense a delay in payment. Even if credit can be obtained, this additional finance may result in great levels of interest repayments and fees.

One of the ways to avoid having too many debtors is to shorten your credit terms and impose this strictly. For example, if you offer 60 to 90 days in credit, shorten it to 15-30 days. It will also be helpful to delegate a staff member to send emails and call customers to collect their payments.

2. You have too many creditors

Having too many creditors may mean that your business has a large amount of debt to pay off. This is particularly disastrous for your cash flow in instances that your business is running inefficiently, you have very limited cash reserves and creditors are already demanding for payment. Late payments can quickly pile up making it even more difficult for you to pay off the amounts owed. Late payments can also damage your relationships with creditors and may result in other problems such as reduced credit terms and premium pricing.

3. Over-financing your business

Borrowing large amounts of money to finance your business involves additional charges such as interest and may require shorter repayment schedules. If you are not wary of your increased borrowing, it can take control of your business. The more finance you take on, often the harsher the terms of the loan, usually at a higher interest rate. Often, borrowing only delays a future cash flow crisis, which may be even worse than the one you are currently facing.

4. Over-selling credit

It would be ideal if on close of a sale the customer always paid with cash up front. However, many businesses today offer credit to their customers. By offering credit to customers, you may not have cash on hand until the payment due date. As a result, you may need to borrow just to continue normal operations. Increased sales on credit may lead to a greater need to borrow, a pattern that may prove to be disastrous to your cash flow.

5. Over-investment

When you have cash on hand, it can be tempting to buy assets such as office equipment, furniture or vehicles. Spending on such items can leave you short of money to finance daily operations and to pay off any unexpected costs that may arise. It is always prudent and good practice to have cash reserves ready for any emergencies.

Some final words

Effective cash flow planning is critical in order for your business to avoid further problems. To address any cash flow problems your business may have, you can also employ the services of a business turnaround expert to help you effectively plan and manage your cash flow.