Cash flow problems -problem-solving model
Cash flow refers to the money that comes in and out of business. This is to say it’s the combination of accounts received and accounts payable. For small businesses, cash flow is hugely a critical aspect to consider. This means one has to do some basic accounting principles even if you are not a finance specialist. If this is not handled correctly, one is likely to find himself not having the capital to continue injecting into the business. For small businesses, there are several common problems encountered due to cash flow problems. Among these problems they include
Late and partial payments.
This is a big blow to small businesses in the growth phase. It is estimated that 60 percent of the invoices are not paid in full, or rather are paid late. It becomes a problem because one has done the work and yet you haven’t been paid. What this means for small businesses is that they are out of profit, and much worse, you are out of business.
Having less cash buffer at hand
A cash buffer is a safety net for business. To come up with an adequate amount, one needs to divide the cash balance with the accounts payables. With this, one can tell the number of days you can go without receiving any payments. According to research by JP Morgan, a small business has an average of 27 days of cash buffer.
Delayed payment posting
This occurs with the electronic payment systems. There is usually a delay between the time the payment is made, and when the cash can be accessible. This is mostly inevitable, especially with the banking systems.
Disorganization
Disorganization leads to loss of productivity. This due to poor keeping of records. With this, one is likely to break even before they know. Therefore, there require to be adequate budgeting tracking, planning, and accurate forecasting.
Sales challenges
This results from overestimating your sales or sales coming to an end. This tend s to slow down the cash flow, although this could be caused by external factors such as the market fluctuations, it could also be caused by internal factors such as the nurturing process and low marketing.
Spending too much and too much inventory
If overheads get into hand, it’s advisable to look back at your most significant expenses and reduce them. The cost of providing products is usually more than the price it was acquired at. This due to costs such as holding charges and other inventory associated costs. It’s good to have enough stock but not too much.
continues growth
For continuous growth, one has to ensure accurate and useful monitoring and budgeting, immediate billing, planning for unexpected, and turning cold leads into warm sales conversations. This provides continuous sales.
Late and partial payments.
This can be solved through various approaches, and they include getting paid in advance or even getting a deposit, sending invoices as soon as possible, offer discounts for early payments. Those that are paid in full have multiple payment options and lastly have a credit check for your customer, although this does not apply to all businesses.
Having less cash buffer at hand
This problem can, however, be solved by having adequate cash buffer, renegotiating payment date with your customers and vendors, and lastly, maintaining and close monitoring of the cash flow management records.
Delayed payment posting
This can be solved by offering cash payment options and opening a line of credit to make purchases while preserving the cash at hand.
Disorganization
This can be solved by having a clear statement of cash flows to notice surges and declines, and implementing a financial tracking tool,
Sales challenges
However, this can be solved by looking into the factors that might cause a decline in sales.
Spending too much
This can be solved by automating repetitive tasks, monitoring your ongoing expenses, and mapping up the business milestone you want to reach before investing more businesses.
Too much inventory.
This can be solved by adequately forecasting the inventory, implementing auto-reorder and purchase processing, and ordering when necessary.
Cash flow problems- obstacles to growth
Cash flow problems often cause barriers to business. Some of these obstacles include
Increase in interest and bank charges
With poor cash flow, one is forced to have external funding, which attracts additional cost. They accumulate to fast, and this causes slow growth to the business.
Missing opportunities
Poor cash flow can cause delays in investing in significant investment in your business, for example, failing to buy a machine that would increase efficiency level. This is a blow to business growth.
Poor relationships with suppliers and customers
Poor cash flows put you in a position that you are always late in paying your suppliers. This causes tension in your relationships with them and may lead to loss of contacts. When contacting customers for overdue, you may end up saying things you are not supposed to.
Employees morale
The cash flow problems cause employees to have low morale since it trickles down from the managers. That is mostly if they are worried about the future, and this slows growth. Among other ways in which it could be an obstacle to business growth is the solvency problem, restricted growth due to limited resources, and increased stress, which lowers the productivity level.
References
Zuiker, V. S., Lee, Y. G., Olson, P. D., Danes, S. M., Van Guilder Dik, A. N., & Katras, M. J. (2002). Business, family, and resource intermingling characteristics as predictors of cashflow problems in family-owned businesses. Financial Counseling and Planning, 13(2), 65-81.
Smith, R. L., & Kim, J. H. (1994). The combined effects of free cash flow and financial slack on bidder and target stock returns. Journal of business, 281-310.
Golden, B., Liberatore, M., & Lieberman, C. (1979). Models and solution techniques for cash flow management. Computers & Operations Research, 6(1), 13-20.