We’ve discussed cash flow before - what it is, what it means for your business - but now let’s discuss what causes cash flow problems. There is a difference between making money and managing cash flow. Managing your cash flow wisely is a combination of being informed, prepared, and making smart decisions. Cash flow problems stem from one of these factors faltering along the way.
One of the obvious causes of cash flow problems are profit issues. This could be lack of profit or sporadic profit. If your company has down months where you make very little money and then shoots up during peak times of the year, you have sporadic profit, and this causes issues for your business. It’s hard to do virtually anything if your business has no money - pay bills, complete payroll, or stay afloat.
Neglecting your bookkeeping is another cause of cash flow issues. Not having up-to-date records on the ins and outs of your business means you’re conducting business blindly. How can you make informed and financially safe decisions for your business if you have no records? This goes hand-in-hand with another cause of cash flow problems, and that’s not scheduling your payments productively. Let’s say you give your clients 30 days to pay, but you need to pay your suppliers in 14 days. Working out the scheduling can help to ensure you aren’t taking money out of a low account or possibly overdrafting, which leads to fees. It’s best to make sure there’s money added to the bank before it’s taken out.
Bad debt, although not your fault, can hurt your own cash flow. When doing business with people, you’re taking a chance and assuming they’ll hold up their end of the bargain. As wrong as it is, sometimes they don’t. To avoid doing business with clients who don’t pay, some companies run credit checks. This isn’t always feasible. Another option, if you’re worried a client won’t pay, is to request the payment upfront. Payment plans are always a helpful option, as well. Getting some of your money is better than none.
The final cause of poor cash flow management we’ll discuss is not forecasting. It’s wise for new businesses to sit down with an accountant to create a forecast for their business - when there will be surpluses, and when there will be deficits. As you gather real data from your business, you can compare to your forecast, and use your findings to adapt your forecast for the future. Being informed and prepared will never be a bad thing when it comes to running your businesses.