Do you ever run out of cash? Have you ever been unable to pay for goods which you need at one particular time because you did not have enough cash? Have you ever borrowed money or incurred bills which you cannot repay immediately?
If yes is your answer to any of these questions, you have already experienced a cash flow problem! Cash is important for business to keep moving. As a liquid asset, cash should be immediately available for spending on goods and services when needed.
In business terms, cash flow is the flow of money into and out of a business over a certain period. A business will face major problem if it has too little cash or even runs out of it completely.
These problems include but not limited to being unable to pay workers, suppliers, landlord, and government.
Consequently, production of goods and services will stop as workers will not work for nothing and suppliers will not supply if they are not paid. Hence the business may be forced into liquidation, that is selling up everything it owns to pay its debts.
Causes of cash flow problems:
- Not paying attention to expenses
- Giving too much credit to customers and not collecting the money at the appropriate time
- Holding to much inventory
- Low profits or loses
- Overtrading
- unexpected or unplanned changes
- Seasonal demand
How to overcome cash flow problem:
A business can overcome cash flow problem in a short term or long term.
In the short term, the following ways could help to alleviate the problem.
- Increasing over draft or bank loans: This will inject more cash into the business. However, payment of interest on the loan will reduce profits. Also, the loans will be repaid eventually which will result in cash outflow. Bank loans can also be a long term approach depending on the loan tenor.
- Delaying payments to suppliers: this will decrease cash out flows in the short term. The downside is that suppliers can refuse to supply or lower discounts for late payments.
- Forming a buying coorperative: You can pool funds with like minded companies in order to get negotiate good price with suppliers for bulk buying.
- Asking debtors to pay more quickly or insisting on ‘cash sales’ only: This will increase cash flows on a short term. However, the business may lose their customers to competitors that still offer trade credit to them.
- Offer discount for early payment: Customers love incentives and offering them discounts if they pay early will improve your cash flow. Nevertheless, this approach will reduce your profit.
- Delay or cancel purchases of capital equipment: this will decrease cash outflows for equipment purchase. Nevertheless, the long term efficiency of the business could decline without up-to-date equipment.
In the longer term, a business with cash flow difficulties will have to take other decisions to solve the problem. These could include:
- Attracting new investors, for example by selling more company shares. This approach provides a permanent fund without interest or repayment but it will affect ownership of the business. If too much shares are sold, you could lose control of the business.
- Cutting costs and increasing efficiency: This may not be popular with employees and could affect product quality.
- Developing new products that will attract more customers: this could take a long time and needs cash in the short term to pay for development of the new products.
Ifunanya Ikueze is an Engineer, Safety Professional, Writer, Investor, Entrepreneur and Educator.
