Cash flow problems can arise from unpaid receivables, excess inventory, unexpected expenses, and overpaying employees. Accounts receivable and inventory management can help prevent these issues, while overpaying employees and unexpected expenses can be avoided through proper planning and budgeting.
Cash flow problems can be quite distressing for business owners and managers, especially when the bills aren’t paid. Common cash flow problems include an inability to collect unpaid receivables, excess inventory and low sales, high unexpected business expenses, and overpaying employees. While many other problems can exist in a business, these are among the problems that can occur in any business that will create negative cash flows.
Accounts receivable allow customers to purchase goods now and pay outstanding balances later. Businesses can vary accounts receivable methods, requiring an advance payment for goods or services with the outstanding balance to be paid within 30 days, or offering a small discount to customers who pay in advance. Cash flow problems begin when the company extends credit to questionable customers who cannot pay the receivable balance on their accounts. The longer customers are late—like 60 or 90 days on open balances—the less likely the company is to get the money.
Inventory is usually the second biggest expense for businesses. Most businesses purchase items from inventory to stock on shelves in hopes of selling the items to customers. Unsold inventory is capital loss. Even though the company can use accounts payable (credit purchases) to buy inventory, it will have to pay vendors and vendors for the products. This creates cash flow problems as the company must pay for inventory without generating cash from sales.
Unexpected business expenses can come from many areas or functions. For example, a vehicle may break down, resulting in large unplanned expenses for the business. If the company spends all of its capital reserves on this repair, any other unexpected expenses could create cash flow problems for the company. Small businesses often face this problem as they have lower cash reserves than other businesses. In addition, the company may need to draw on a line of credit to finance these unexpected expenses. This increases interest payments on lines of credit, resulting in more cash flow problems.
Employees are the number one expense for most companies. Companies that hire too many employees or overpay for job roles will have cash flow issues. Business owners and managers may think they need to pay higher wages to attract highly skilled workers to the business. If those workers don’t meet expectations for increased revenue or increased production time, etc., however, the company is overpaying for the completed work. This will result in higher expenses and less products to sell for cost recovery.
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