Business owners may find issues with cash flow perturb them as revenue and profits. It is defined as the net of cash and its equivalents going in and out of the business. It is generated when you sell goods and services or collect payments from customers in cash. When you have positive cash flow, it means there is more money coming in than going out. Negative means more money is leaving, simple right?

 

Why is it important? You’re standing with how cash is flowing is an indicator of your business’ health and status. It will also help you understand your outlook in the coming years. The importance of cash flow is directly connected to your business’ survival, it is the lifeblood of your endeavor so it’s important to keep pumping them. There are many things that can cause the business to fail such as the economy, debts, and many more, but knowing how the money is moving will be an early indicator of how things are faring. Neglecting those indicators can aggravate an already risky situation.

 

Here are some situations that can cause your cash flow to belly up:

Low sales performance

Price is a factor in how sales will perform, thus the money coming in. Customer performance can affect a company’s cash standing even if you lower your price. The economy will also play a big factor in how your customers go to you for their needs.

 

Overhead costs

These are costs that aren’t directly affecting your business’ production and sales. They can be about rent and other utility expenses. Having too high overhead costs will hurt your standing even if you’re doing well in sales. When worse comes to worst you won’t be able to pay for your overhead cost and you’ll be forced to close.

Low profits

If your business is not profiting as you like them to be you’ll be having a hard time to cover your expenses. You may be losing profits due to the following reasons:

• Sales and Marketing are not effective.
• Low Personnel Productivity
• Pricing is too low to cover costs.
• Too much spending
• Supply-chain issues

 

Accumulating overdue receivables

If you’re not collecting from your customers on time you’ll be facing a negative cash flow. Customers with bad credit will hurt your standing because they won’t be able to pay you on time or worse, will default. In 2016 a study shows that 77% of SME owners are feeling the impact of late payments and 35% has had their personal finances affected because of late payments. Your customers are obliged to pay just as you need to keep paying your rent and your overhead costs to keep the doors open.

 

Debt

Acquiring too much debt will affect you when the time comes to collect. Short-term debt should be limited to a certain amount because the period with which you need to pay it is shorter. This means you’d be needing a significant amount of cash right away, in contrast to long-term debts that will be staggered for a few years.

 

Poor Investments

If you’re new you’d be tempted to be too optimistic and you’ll invest in things that you don’t need, especially if you have cash. Spending money on things that are not yet critical will deplete your cash and you won’t have enough when you really need it. Investing in your business is important, but you’d have to know the intricacies of the business before investing in things like large trucks and warehouses. Start slow and if you have enough and there’s a need to expand then that’s when you spend your money.

Overstocking

This is also a case of being too optimistic without having the right information on the business environment. There are businesses that are seasonal, so you’ll have to expect times where there’s a dip in sales performance. Overstocking can happen when you try to stack inventory in anticipation of the season. Or worse, you did not anticipate the dip and you have inventories for the off-season. This will incur inventory costs and if they go bad before they’re sold, you’ll lose more.

 

Insufficient free cash

Having a few reserves for rainy days will bite you back. Free cash will help you sustain during the off-months and will also cover for unexpected expenses. You can set aside at least two months of operating costs to your savings account.

 

If you’re an established business owner or a startup you don’t need to hire somebody to check your cash flow. You only need to understand the basics of accounts receivable and accounts payable and you’ll know where you stand cash-wise. It is important to understand your own business and how cash is moving in and out of it, so you’ll know how to keep them coming in.

 

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February 24th, 2020 by financetwitter

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