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Cash flow problems can arise from unpaid receivables, excess inventory, unexpected expenses, and overpayments to employees. Companies can manage receivables by offering discounts or requiring down payments. Unsold inventory is lost capital, and unforeseen expenses can strain cash reserves. Overpaying employees can lead to high expenses and fewer products to sell.
Cash flow problems can be quite distressing for business owners and managers, especially when bills go unpaid. Common cash flow problems include an inability to collect unpaid receivables, too much inventory and low sales, high unexpected business expenses, and overpayments to employees. While many other problems can exist in a business, these are among the problems that can occur in any business that creates negative cash flows.
Accounts Receivable allows customers to purchase goods now and pay outstanding balances later. Companies can vary their methods of collecting receivables by requiring a down payment on goods or services with the balance due within 30 days or by offering a small discount to customers who pay in advance. Cash flow problems begin when the company offers credit to questionable customers who are unable to pay their balance of receivables. The longer customers fall behind — like 60 or 90 days with open balances — the less likely the company is to collect the money.
Inventory is often the second largest expense for businesses. Most businesses purchase inventory items to stock on shelves in hopes of selling the items to customers. Unsold inventory is lost capital. While the company may use accounts payable (credit purchases) to purchase inventory, it will have to pay vendors and vendors for goods. This creates cash flow issues, as the company has to pay for inventory without generating cash from sales.
Unforeseen business expenses can come from a variety of areas or functions. For example, a vehicle could break down, resulting in large unplanned expenses for the company. If the company spends all of its capital reserves on this repair, any other unexpected expenses can create cash flow problems for the company. Small businesses often face this problem, as they have lower cash reserves than other companies. Additionally, you may need to draw on a line of credit to finance these unexpected expenses. This increases interest payments for drawdowns of credit lines, resulting in more cash flow problems.
Employees are the number one expense for most businesses. Companies that hire too many workers or overpay for job functions will have cash flow problems. Business owners and managers may feel that they have to pay higher wages to bring highly skilled workers into the business. If these workers don’t live up to expectations of increased revenue, increased production time, etc., however, the company is paying too much for the work completed. This will result in high expenses and fewer products to sell for expense recovery.
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