15 Jan Why businesses struggle with cash flow?
Businesses need cash to survive. They need it to pay for the crucial things to run their business like rentals, utilities and payroll.
When a business does not have enough cash to pay its liabilities and responsibilities or when it is spending more than it is earning, that is what is otherwise knows as a cash flow problem.
One would know that businesses are having trouble with cash flow when it can no longer make payments to its suppliers, or when wages for their employees come late.
Sometimes, if problems are extreme, businesses are no longer able to pay taxes and the company is having trouble with tax authorities.
These problems will surely bring a lot of stress and people around you are affected.
These problems, fortunately, are preventable. As a business owner, you should be aware of these causes so you could build up a healthy cash flow for your business to thrive and therefore, do away with unnecessary stress.
What are the causes of cash flow problems in business?
Sales are going down
Declining sales is one of the biggest and probably the most obvious factor that leads not just to cash flow problem but also for the businesses’ ability to earn a profit.
Remember, if you do not make any profit, if sales continue to dwindle, you will eventually run out of cash.
There are many reasons that could be attributed to why sales go down.
An example would be that competition is offering something better and overlooking at what your competition is doing. Maybe your marketing campaign has weakened; or that your promotions are not enough to bring the customers in.
Business owners need to look into it because after all, this is the main reason why you are in business anyway—to earn. They need to constantly be innovative to stay on top of the game in their field of business.
No sales mean a loss in income
The longer you let this happen, it will accumulate and this will lead to you getting loans just to stay afloat. If you do not address this right away, you will be buried in debt.
To combat this, make sure that your business is income-generating. If you need to seek advice from experts on how to turn this around, you should consider it, if you want to save your business.
Study your business. Study your competition and analyze well what needs to be done and come up with a business plan that can help you improve your sales.
You invest in things that are ultimately useless. Like a machine in your factory that after a few uses, you realize it is totally worthless.
Another example is buying a technology that you thought would generate more revenue for the company but you find out that it is not helpful at all. You waste cash, you waste money.
It is important to make a study about what you are getting your company into because money spent unwisely is not coming back.
Not keeping track of your company’s expenses
Businesses that find themselves at a bad end of a cash flow problem are owners who cannot manage their own expenses.
There are businesses that do not have a solid system in tracking the expenses. Because of this, owners will just spend at will and this usually ends badly as they find themselves spending more than they are earning thus leading to cash flow crunch.
Failing to collect collectibles on time
Businesses should also have a strict implementation of their collection process. A delay would affect the company’s cash flow.
Sometimes, business owners, especially those that that are very hands-on, are so bent on running the company that they tend to overlook this rather important aspect of their business.
Businessmen should always remember that they need to set up a scheduling system for the collectibles to be collected on time.
Too much overhead costs
There are several instances when you have to pay for too many things that your cash flow suffers.
This overhead could be rental, bills for electricity, phone and other utilities and other things that you need to pay for. But sometimes the overhead may be too much compared to your sales volume. And this is where a problem occurs.
It is important to constantly audit or monitor your expenses all the time and as regularly as you can and compare it against your sales. If needed, cut back when you have to.
One of the things that you can cut back on is the use of electricity, or picking a cheaper plan for your Internet and telephone network.
However, this may seem tricky because sometimes, choosing the cheaper option doesn’t necessarily mean that it is the best choice for the business.
Just make sure that you find the balance of cutting back without sacrificing the quality of service that you offer.
Sometimes, we feel that as long as the business is growing, it is a good thing. However, if it is too sudden, without a good business plan in mind, could be detrimental on your cash flow.
You need to put everything in place first like infrastructure and resources enough for you to take on a challenge for your business like maybe an expansion.
Because without the proper preparation, you will have to depend on your cash flow and it more likely than not, it cannot sustain.
Cash flow problems are great possibilities when running a business. And if left unsolved, the extremes that could happen is it will bring a company down. However, the factors that bring about cash flow issues are avoidable.
As mentioned, implementing a system within your own organization and having clear goals and projections and following them will help prevent these problems and will help your company grow.
Most importantly, be disciplined in managing your cash flow and always look ahead to the where the company’s finances are going.