Cash flow is basically the flow of cash that is available for buying various business-related materials or to carry out various business-related tasks. In any business, it is important to manage the cash that is coming in and to keep the account of the cash that is going out.
Many small businesses suffer from cash flow problems. But thankfully most of the cash flow problems can be resolved if the right steps are taken at the right time.
Here are 5 very common cash flow problems and their solutions:
- The overhead expenses are too high to maintain.
The overhead expenses include the rents payable, electricity bills, telephone bills, legal fees, repairing, taxes, insurance, promotion fees, etc. They are the extra expenses that every businessman has to bear to run a business properly. They are directly deducted from the profit earned.
Sometimes these overhead expenses cross the limit. They exceed the profit of the business. They directly affect the cash flow of the business. This problem should be resolved as early as possible as this can ruin your business.
There is only one solution, which is scrutinizing your expenses and bringing down the extra expenses where you can and if it’s not possible then switch to less costly options.
- Too much of stuff in the warehouse
This problem is commonly faced by those businesses which manufacture products or by those resellers who maintains a warehouse to store their products. There are times when excess products are manufactured or too much stuff are bought to resell. There may not be a requirement of the whole. So these excess products get shelved and thus creating a problem of cash flow.
Start keeping a record of your inventory. Keep a stock of only those items that will be required the sooner. Try to store the items for the shortest period of time before selling them.
The quantity of the products that you store directly depends on the size of your warehouse, upcoming sales, your supplier’s capacity and the money available for the business. So be very careful in monitoring your warehouse as it would not be likely to not have those products that are extremely necessary as that can make you lose your valuable clients.
For the companies that do resell business, they can always opt for purchase order financing strategy. This will help them to make big purchases even if they do not have enough funds.
- Very less profit margin
Many businesses face this problem very often. There are times when they are compelled to sell their products at such low rates that they hardly have any profit margin. At times they even have to sell the product at a price lower than its manufacturing cost.
This is a very common scene in today’s world where all the businessmen have to face cut-throat competitions with their rivals sitting to beat them every time. There is a constant pressure of reducing the price of the products or services they offer. Mostly small businessmen are exploited in this process.
To solve this problem at first you need to list out all the products and services that your business offers. Then in the second step calculate all the costs related to the products that you have paid. Once you are done with the second step, try and increase the price of those products which have very poor profit margins. If increasing the price of the products is not possible then be strict enough to turn down offering those products or services. Always remember to consider only those contracts that give you proper profit margins and you don’t have to suffer a loss.
- Clients are too slow in paying bills.
Every business generally follows a 30-day or a 60-day payment policy. But small businesses always can’t afford to wait for this long to receive payments from their clients. They are always in need of money as they have lesser funds in comparison to large businesses. These slow payments start building cash flow problems which cannot be avoided.
The very easy solution to this problem is to bribe your clients to pay faster. Did not get it? Well, you need to offer some incentive to your clients which will motivate them to clear your dues as early as possible. For example, offer them an additional discount of 5% if they pay within a week.
This additional discount entirely depends on the profit margin of your products or services. Design your invoice in such a manner that you can allow this extra incentive to your clients. However, this additional discount is subjected to direct negotiation with every client individually.
- The increased amount of bad debts
Bad debts are basically those capitals that are stuck with the clients who did not pay after taking the products or using the services. This problem directly affects the cash flow of the business and even hampers the profit.
This is a very common problem that is faced by both small and big businesses. The clients sometimes have genuine reasons to be unable to pay and sometimes they deliberately do so to take undue advantage of your loyalty towards them.
The very easy solution is to stop offering products in credit to your clients. But this is not feasible. So at first, you need to check out the payment track records of your clients. Offer credits to only those clients who have a very good payment record. And for the rest ask them to pay as soon as you deliver the products or best is to ask them to pay in advance.
Hope you find this article useful when you face a serious cash flow issue in your business.
Can You Find Solutions And Take Challenges In Cash Flow Management?
Challenges are worth when you have a clear idea of what you are venturing into. This becomes easy when you know what makes things correct and what puts us in the wrong track. Thus you need to have a clear outlook on what you do?
What is the cash flow?
Cash flow accounts for the rise and fall of the financial condition a business, an individual or an institution has. You may say the money that is used up or generated within a particular time period. There are essentially several types of cash flows. A number of them will be highlighted below. The main aim is to give a clear idea about the whole deal.
Cash can be from the business deals of the company itself and not from outside that includes investments from other shareholders or stock purchases. Cash can from the free cash that is left from the main sum after the business deals. Cash flow can be to other organization or sister concerns. Also, the cash flow amount varies from one fiscal year to the other.
How is cash flow important?
It is important as it serves as a tool in business activities and doing analysis based on financial status. It is the most parameter used in financial calculations and accounts.
The others use which can be noted are calculating the costs of the total business and its importance in the market. To check if an investor would get the correct returns for his investments. The cash flow is also useful to see whether can handle short term problems that too in financial matters. To assess how much cash a business takes up for a particular share keeping in consideration the share price.
There can be other uses of cash flows but you must now be leading to as how to manipulate or take up the challenges occurring in cash flows.
Cash flow problems can be made correct through a number of ways among them juxtaposing financial and nonfinancial solutions are an important step towards solving the problems. The strategies and preparation that must be taken to eradicate the cash flow problem need careful assessment. The ways how you can solve a problem depends on how skillful you are in dealing with the problems.
There may be a number of ways by which you can solve but only a good solver can choose the right track he/she should follow in order to mend the case. Thus what you most require is a good brain and a will to find a perfect solution.
When you are in a company you have to look at every nook and corner and keep things steady. To do this you have to run a trial at which activities are necessary and which can be abandoned forever. Some activities may arise which are not important as of now but may prove vital in the long run. Thus a clear conscience of what are your aim is a worth agenda to shape out. To cut your cloth according to your piece requires the effort that a person of the company must constantly give so that it remains under the daylight. To cut those expenses which seem as not useful that is overhead expenses is a requisite task. These expenses affect the cash flow of a company and this is a permanent one if not looked upon.
What can be the remedy?
To make an audit that is to calculate expenditure and accordingly subtract whatever you feel is unnecessary. In doing this you need to keep in mind that too much of curtailing may wipe out the real part of the task and the company may run into a loss. Thus at every step, you need to have a good outlook.
When you are in a business you do not get all your money at hand at the end of the day. This is also true for mom and pop businesses. A merchant or a simple shopkeeper would surely require to invest some money to withhold the payments that he did not receive. He would keep in mind that the payment he did not receive does not incur a loss on the whole deal. When these payments are enough to put you under its burden that is the sum is much bigger.
To avoid such circumstances the only way you must take up is completing the payments by giving exchange offers. How can you do that? That is you can give discounts in exchange for payment. These steps can easily motivate a customer to pay his or her dues before time. This, on the other hand, reduces your cash flow.
The payments which are long term and in short pulses can be financed this facilitates the incorporation of the customers in timely payment of the dues.
The other problems that can arise are if you are one of the big companies, and that company has big investments in its products. It is true that you have maintained a wide range of products and have enough space to display them. But the thing you must keep in mind is that the product quantity must not exceed what is required by the company. It would be cash flow if the number of products filling your space of storage exceeds to what your concern really requires. Thus you have to be choosy in what products to keep and what you can throw away.
This problem can also be mitigated by a number of measures. The first can be to buy fewer products and if you have bought exchange them some other which are useful. To sell the good at a lower price giving discounts can also e a way to clear the stocks in your store and to make space for the new.
You have to take risks in business but in taking them you have to forego giving debts to someone who does not pay on time. Also, you have to cut your thoughts in selling products beyond your limits and all these you need to do in a skillful manner so that it does not affect your business’s financial condition. Thus you have to keep in mind all these challenges and innovative ways to resolve them.
Nancie L Beckett has an MBA degree from Boston University and has much experience in all these matters. She can help you out with his six years of experience and give suggestions as to how you can resolve problems that come in your way in the case of cash flow. Thus you must hesitate to ask her your doubts and she would be ready to help you out with his profound ideas and vast knowledge.