Cash flow problems can be caused by anything from a lack of funds to an overabundance. It is important to have a plan in place for dealing with these issues before they arise so you can avoid potential losses and stress.
The causes of cash flow problems and solutions is a topic that has been heavily discussed in the business world. This article will go over some of the causes and potential solutions to these problems.
Simply put, cash flow is the difference between what you have coming in and what you have going out. It’s all too tempting to believe that if the former number is more than the latter, everything is OK. But keep in mind that cash flow is not the same as profit.
On paper, a high quantity of overdue purchases in accounts receivable that won’t arrive for many weeks may seem lucrative. In fact, it may jeopardize your company’s survival. Especially if you have past-due accounts receivable and your vendors are demanding urgent payment.
Ironically, these types of gaps are especially hazardous for fast-growing and lucrative product-based companies. Why? Because every time you acquire a new client, you’ll have to buy raw materials to complete their orders (not to mention hire new employees and invest in new equipment) before you get paid.
So, what measures can you take to avoid cash flow issues and enhance your total financial position?
1. Maintain a Cash Flow Forecast.
In business, there is always unpredictability, but having accurate and up-to-date cash flow projections may help you confront that uncertainty with confidence. Looking at previous year’s sales should give you an indication of how much money you’ll earn this year. If there has been a crisis or a drop in sales, move to a month-by-month review and develop from there.
Then figure out how much it costs to produce your products and services, since this can assist you adjust your forecast if large new orders come in unexpectedly.
At the same time, remember to include in all of your fixed expenses, such as the cost of maintaining your premises and paying your employees, such as wages, rent, business rates, and bills, as well as any tax obligations.
2. Make a conscious effort to compare your predictions to reality.
Your predictions will be worthless unless you compare them to reality on a regular basis to ensure that your numbers are correct.
Doing so on a month-by-month basis will allow you to fine-tune your numbers, allowing you to forecast how much cash you’ll have in hand in a week, a month, or even a year.
3. Make a number of cash flow forecasts.
Preparing three distinct predictions is a smart approach to protect oneself from any unwanted surprises:
- The ideal situation
- Consider the worst-case situation.
- An option that falls somewhere in the center.
To come up with these numbers, you’ll need to examine how your market is changing, seasonal cash flow issues, if new rivals are likely to pose a danger, and whether your current clients are completely happy or contemplating switching providers.
You may now handle these forecasts individually using conventional spreadsheets, or you can use a business planning tool like LivePlan if you want a more efficient approach. Whatever choice you choose, be sure to maintain them up-to-date based on current trends and that one accurately represents your current financial situation.
4. Keep things in perspective.
Don’t fall prey to the temptation of thinking everything will go well; an overly optimistic prediction can soon lead to disaster.
Make sure you aren’t fiddling with dates to get the figures to appear right. If issues are likely to arise in the future, you’ll want to be aware of them now so that you can prepare for them.
Symptoms of typical cash flow issues
When it comes to issues, even when you’re actively managing and predicting your cash flow, it may be tough to see them. But it doesn’t have to be, and all it takes is recognizing the warning signs of impending or continuing issues.
Keep the following five indicators in mind as you go through the list of ways to improve your process to avoid cash flow difficulties. They will help you avoid typical cash flow concerns.
1. You have a lot of accounts receivable.
Because many companies invoice their customers and collect payment when the service or product is provided, it’s common to have some unpaid bills at any one time. The problem is that you won’t have your customer’s money until they pay you, therefore you won’t be able to fulfill your costs until they do. All you have is their promise of payment.
If you’re finding that your receivables are increasing month after month but you’re not bringing in more money, it’s time to rethink your payment terms and invoicing method.
Consider keeping track of your receivables turnover ratio to evaluate how effectively your company is collecting its accounts receivables (net credit sales over average accounts receivables balance). A low ratio may suggest that your payment terms and policies need to be reviewed.
2. You have a lot of inventory but not a lot of orders.
Firms that sell to other businesses may want to have a large amount of inventory on hand to guarantee that they can handle requests of various sizes. However, if the bulk of your cash is invested in that goods, and your consumers aren’t rushing to purchase, you may have difficulties.
You don’t have enough liquid cash to fulfill your payments until your inventory goods are sold. Plus, you’re presumably paying for storage, and you’re putting your inventory at danger of being destroyed or stolen, or just becoming outdated or less in demand before you can transfer it.
3. Your company is overextended.
Though you may be eager to expand or develop your company fast, it’s critical that you do it at a fair pace. If you overextend your firm, a large portion of your cash will likely be locked up in capital and operational costs, limiting your company’s short-term flexibility.
To prevent dealing with cash flow issues caused by overextension, be sure to plan your expansion carefully ahead of time. Don’t simply spend and hope for the best; examining your main financial statements—cash flow statement, income statement, and balance sheet—on a regular basis can provide you a clearer picture of where your company is and where it’s going.
4. Your sales are on the decline
It’s possible that the economy is in disarray. Perhaps there’s a lot of fresh competition for you. Whatever the situation may be, if your sales have been continuously decreasing over the past several quarters, your profit margins are likely to be cut as thin as possible—if they exist at all.
Because your overhead expenses are unlikely to alter, decreasing sales may signal impending cash flow issues. You may want to change your approach, or at the very least your cost budget, to fight decreasing sales.
After that, dig a bit deeper:
- What is the source of your losses? Is there a demographic where you’re not selling as much as you used to?
- Is there an issue with the technology or the process? Is your website’s sales page broken? Is customer service a source of dissatisfaction for in-person customers?
- Are there any macro-level developments in your sector that are impacting common benchmarks in general right now?
- When was the last time you updated your message or revised your buyer personas?
- Is your company’s business model still viable?
- Do you have seasonal fluctuations in your business?
If sales are down for a month or two, you may not have a major issue to deal with. However, if you see a longer-term pattern, now is a good moment to make sure you have a strategy in place. Reduce hazards by first being aware of them and devising a strategy to address them.
5. Your company isn’t profitable.
After all, if you spend more money than you get in, it shouldn’t take a rocket scientist to figure out that you’ll run into cash flow issues sooner or later.
If you find yourself in this situation, you should reconsider your company strategy to determine if there are any changes that can be made to improve profitability. It may also be time to consider if raising your pricing makes sense.
It’s not always an emergency if you see one of these signs in your company. Take advantage of the chance to examine your financial performance in depth, and ensure that you’re planning far enough ahead of time to be able to get a loan or line of credit if you’re approaching a difficult moment.
Boost your cash flow.
Even after thorough preparation and recognizing the symptoms, you may still need to increase your cash flow dramatically. This may be the result of a simple financial oversight, an economic downturn, or a variety of other factors.
Check read our post on increasing your cash flow to get started if you need to discover fast and effective ways to improve your liquidity.
The how to solve cash flow problems in a business is a solution that can be used to prevent cash flow problems.
Frequently Asked Questions
How can cash flow problems be reduced?
Cash flow problems can be reduced when you pay your bills on time, when you keep track of your spending, when you set aside money for savings, when you find ways to save money in the long-term.
How do you preserve cash flow?
I dont know how to preserve cash flow.
How can cash flow forecasting problems be avoided?
By avoiding the problem, of course.
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