REASONS WHY YOU HAVE CASH FLOW PROBLEMS AND HOW TO FIX THEM

Why do businesses have cash flow problems?

Cash flow is the money your business has in hand, minus any of the money it owes.

The concern of not having enough cash on hand to pay expenses can be a nightmare for any business. However, understanding the reasons behind a lack of cash flow and how to solve the problem can help alleviate the stress of not having enough capital.

Let's say a company has many orders coming in at once. The company needs to purchase materials and supplies and hire more employees to handle the increase in workload. This can strain the company's budget and create a drain on its funds. In addition, customer-facing businesses may have trouble turning around products fast enough to meet their clients' needs. If a customer wants his order delivered tomorrow, but the company can only complete their projects in three days, that could leave the company with no way to pay its workers or buy the necessary supplies to get more work done.

The first step to improving your cash flow is looking at your cash flow statement. A cash flow statement is a record of where the money came from and where it went.

In a positive cash flow statement, the income and expenses are equal, which means you're making money.

A negative cash flow statement means that either your spending is outstripping your income or that you're keeping money in the business to meet short-term requirements but not building for the future.

When you're creating a cash flow projection, the point is to create an honest picture of how much revenue you'll bring in and how much will get paid out during the period you've selected for your projection.

To determine how much working capital you need to run your business, consider developing an operating budget that shows your expected sales and operating expenses for a specific period. Companies with long payment cycles will benefit from a pool of excess cash to support their day-to-day needs.

Some common reasons for cash flow deficiency include:

a) Low inventory turnover, lack of inventory planning.

b) High accounts receivable balances

c) Delayed payments from customers

d) Irregular expenses can cause cash flow issues

Why is cash flow so challenging to manage?

Cash flow is affected by unexpected expenses and incomes. If a company has unexpected expenses, it quickly uses up its available cash, making it difficult to pay for future expenses. On the other hand, if a company has an income that is more than expected, that extra income could be used to give the company or its investors some extra spending money or to invest in another business.

A CFO can help improve cash flow by ensuring that the company can handle unexpected expenses with the income from its regular operations.

Cash flow management is complex for many reasons. A company's ability to generate enough cash to meet expenses can depend on any number of factors, such as 1) whether they have the proper sales channels in place to sell products or services at profitable prices, 2) whether they are paying their bills and taxes on time and in full, or even 3) whether they have the right staff in place that understands how best to manage cash flow within a company's operations.

For example, supply-chain management is another problem that can lead to poor cash flow: if an item is needed by one part of the company, but the materials required to make it are produced at another end of the supply chain and take two weeks there, two weeks back, and one week at that location, then there's slow movement on all fronts, which means fewer sales taken by other areas.

Cash Flow Management Primer

Many companies find it challenging to manage and improve their cash flow, but there are several steps that CFOs can take to make the process smoother and more effective for the entire organization. The first step is setting up basic procedures within accounting software to help monitor cash flow effectively. This includes setting up specific accounts for each type of transaction for easy tracking of all reports and invoices —and, as a result, easily analyzed and improved upon.

Some other solutions available to improve cash flow include:

1) Streamline your billing process. Offer discounts if invoices are paid sooner than when there are due. For example, 2% off if paid within 15 days or 20 days from the invoice date.

2) Improve your invoice collection process. Take a closer look at your collection practices and set up regular automated reminders for your customers. Set up your business to accept electronic payments. Use technology to your advantage.

3) Reduce expenses to increase cash flow. Contact vendors and negotiate terms of payments, discounts, and other opportunities to save money.

4) Maximize your business' profits by increasing sales and revenue. Introduce new products or services that bring in revenue.

5) Create a cash flow budget. Know your numbers and how much you need every month to run your business.

6) Know the actual terms and features of your loans. Build a relationship with a banker who will help you understand the most out of your money.

7) Take time to learn something new that could benefit your business

Takeaway: Cash flow is the lifeblood of any company. Adding cash flow to a small or mid-sized company can take time, but companies can accomplish it with diligence and good planning.