Common Cash Flow Problems and How to Solve Them
Cash flow problems are simple enough to recognize when they come along, and they normally spur action right away. This is simply because cash flow problems are just that – problems. They interfere with business operations, and they can even lead to the collapse of a company if they go on too long.
This is why invoice factoring services and other types of business loans are often needed by companies suffering cash flow problems. These are, however, only temporary measures.
What is a Cash Flow Problem?
As the title of this article suggests, there are several types of cash flow problems, which might require different methods to rectify. Nevertheless, they all involve the problem of not having the requisite funds to meet financial obligations when these need to be met.
This is the most important thing to understand – a cash flow problem is independent of total profits. You might well make enough in the course of a month to pay for everything that month, but what if a bill is due on, say, the 14th of the month but you can’t pay it until an invoice, due on the 20th, has been paid? In this simple hypothetical, the company makes enough money to meet financial obligations, but not on their due date.
For a business of any size, learning about common cash flow mistakes is a wise move. Mistakes learned are the best defence against repeated mistakes.
Common Cash Flow Problems
So, what are the most common cash flow problems? As all cash flow problems involve money being unavailable when it is needed, it follows that cash flow mistakes often involve companies investing in things that they cannot yet afford, even if overall profits suggest that they can.
A simple lack of financial diligence can also be the culprit, and for this reason, a detailed budget is the best defence against cash flow problems.
Here follows some of the most common cash flow problems:
Sometimes, it is not your fault. A cash flow problem arises at times because a client does not pay an invoice on time. The way around this could be to insist upon upfront payment, but some clients may like to see the work or goods before they pay for them.
Nonetheless, a system of reminders for clients can certainly help, and there are all sorts of payment plans you can insist upon, such as the well-known “half now, half after”. Another sensible move is to choose your clients and customers carefully, ensuring that they can pay before you do business with them.
Insufficient Cash Buffer
Business is never 100% predictable, and financial shortfalls are all too expected. If your company is managing to get by at the present moment, one disaster could mean a serious cash flow issue. Accordingly, it is wise to factor a cash buffer or safety net into your budget and limit your investments in order to be able to afford this.
Sacramento web designer Peak Design, for example, say that web design can be handled in-house when the cash for investment in professional services is not forthcoming.
Not everyone who starts a business has a head for numbers, and few of them are actual accountants. And yet, this level of expertise is often necessary to avoid going broke without even noticing. Such services should be factored into the budget, and you should find out whether you need them or not.
Cash flow problems do not spell immediate doom for a company, but they can easily do so if not addressed – and urgently.