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Cash Flow Problems

Cash flow problems can interrupt business operations due to temporary reductions in available money. Common causes include low profits, overinvestment, too much stock, lenient credit terms, overtrading, and seasonal demand. Managing cash flow involves cutting costs, rescheduling payments, using overdrafts, and finding new revenue sources.

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Jo Malaluan
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31 views

Cash Flow Problems

Cash flow problems can interrupt business operations due to temporary reductions in available money. Common causes include low profits, overinvestment, too much stock, lenient credit terms, overtrading, and seasonal demand. Managing cash flow involves cutting costs, rescheduling payments, using overdrafts, and finding new revenue sources.

Uploaded by

Jo Malaluan
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Cash Flow Problems

Cash flow problems in business can cause major interruptions to operations.


These problems are unfortunate, and are often avoidable, because they reflect only a
temporary reduction in the amount of money available and do not reflect the actual
earnings during the year. A company can actually experience cash flow issues during a
growth phase. Business models that work on longer billing cycles and businesses that
incur upfront costs will see cash flow shortage when they grow because the daily
operating costs are forced to shift towards the new costs incurred .The quick fix for low
cash flow in a given month is to pull out the credit card to cover costs. This can work but
it's really just a band aid and unless you have exceptional interest rates, the fees can
add up. Bank loans are also effective but they require long wait times during the
application process and you need the cash quickly.
Utilizing a revolving line of credit against invoices is a good method of managing
cash flow difficulties. A line of credit held against the outstanding invoices guarantees
the money is coming and the rates are often much lower than a conventional credit card
or loan. Basically, the bank holds up the business to maintain cash flow until the
invoices are billed and collected. The money is available when needed but using the
line of credit is also not mandatory.
The invoicing process itself must work efficiently and any late, outstanding
invoices require a pressure plan to force payment. Allowing customers to pay late is
unacceptable and disruptive to your business. If problems with collecting are an industry
norm, allocate the time to make collections a regular habit.
Main Causes of Cash Flow Problems

Low Profits or (worse) Losses

In usual case, some business having a low generation of profits in the operations
implies a lower cash inflow towards the company. With this instance, it would be hard
for the company to sustain its position in the market if the latter cannot provide enough
cash to finance its daily operation as a result of losses.

Over-investment in capacity

At this point of activity in a business, a company who’s having a large or excess


production capacity might yield cash flow problems. This portion only increases cash
outflow as the company spends too much in terms of increasing its production capacity
without a minimum level. On the other hand, a company who’s having idle factory
equipment or those which are in excess to be used also results in cash problems as it
increase outflows. Those equipment that are not in use or not necessary to be part of
the company’s daily operation should be mitigated or in solution should be held for
trading in order for the company to acquire gains from its proceeds.

Too much stock

Holding too much inventory on hand is the negative cost implications. Purchasing
any type of inventory or product ties up the funds of the company and prohibits those
funds from being used elsewhere in the business. Holding too much inventory ultimately
affects the cash flow of the business, especially when the inventory is sitting in storage
and is not being sold for profit. Moreover it might lead also to the deterioration of the
stocks.

Allowing customers too much credit

When you begin selling to customers on credit, your cash flow will be
immediately affected. For example, if you begin to offer credit terms for 30 days, the
cash that you would normally receive during this time will disappear. You will not have
this cash to pay your bills, employee and suppliers. It is much better if the company
would implement a stringent credit policy and collection as well as credit terms allowing
for discount in order not to lose the customer’s trust.

Overtrading

As a business struggles to find resources or cash necessary to service a


customer before the business is paid. Expanding the scope of the business might
trigger the company itself to be on the pressure point of finding resources to finance the
needed portion in the plant expansion. Thus, due to this instance, it might strain the
cash flow of the company at the same time affects the generation of profits for the
company.

Seasonal Demand

If you have a seasonal business, such as in tourism or farming, you may have
difficulty meeting financial obligations during slow periods. Even though your revenues
may be decreasing, you still have to pay your fixed costs. If your company has seasonal
highs and lows in demand, you probably try to optimize inventory levels to meet your
demand cycle. Using high-cost credit such as credit cards and bank overdrafts can
significantly affect working capital, especially in a seasonal business. It’s a good idea to
lower your credit costs. One way to do this is by consolidating your debts so as to both
reduce the interest you’re paying and negotiate a more flexible repayment schedule.

Moreover, a company can mitigate such cash flow problems through:


1. Cut costs- if a business can lower its costs, the result should be reduced cash
outflows. It can be outdone through employing fewer staff or holding smaller
stocks of raw materials. The business may use cheaper sources of fuel or raw
materials.
2. Reschedule payments- a business may agree with its suppliers to whom it owes
money to delay its payments (outflows) in order to have a sufficient time to
receive inflows of cash to be used as payment. Alternatively, the business may
also persuade customers to pay more quickly, thereby speeding up cash inflows.
3. Overdrafts- using overdrafts as a short-term, flexible loan that can provide the
business with the cash that it needs. In effect, arranging an overdraft provides an
immediate inflow of cash.
4. Find new sources of cash inflows- it may be possible for a business to generate
extra cash inflows that can be use upon the daily operations of the business as
an extra fund in order to lower down cash flow problems arising from outflows.

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