First published: September 12, 2022 @ 6:00 pm
Poor cash flow management is one of the top reasons for businesses to fail.
A lack of cash flow typically causes businesses to go out of business. In this article, we will look at the top 10 causes of poor cash flow.
1. Early Expanders
When you’re expanding, your operating costs go up.
This means that you need to increase your cash flow. If you’re expanding too quickly, you may end up spending more than you can afford.
In this situation, it’s easy to overspend on the wrong things. In particular, overspending on technology updates is a common mistake.
If you don’t want to experience this problem, be sure to manage your expansion carefully.
2. Poor Investment Strategy
Never invest when you have no cash reserve. The saying “money is the root of all evil” comes to mind.
The same goes for investments. If you don’t have enough cash reserve, then you can’t afford to lose any money.
This will make it very difficult to earn a profit. Investing when you have no cash reserve is just asking for trouble. So, be sure to have a cash reserve before investing in anything else.
3. Bad Cash Flow Management
Cash buffer, cash inflows, cash outflows, and cash flow forecasting are the 4 steps to a strong cash flow management.
Without them, you’ll have to do a lot of things to manage your cash flow.
Cash management is the process of managing cash flows in order to optimize financial performance.
It is crucial to control your cash and debt levels in order to achieve maximum financial performance.
Whether it’s hiring a debt management expert, getting a personal loan, or dealing with your taxes, it’s essential to get help from a professional.
You don’t want to find yourself in the position of having to sell your business at a loss because you failed to manage your cash flow.
Photo by Josh Appel on Unsplash.
4. Too High (or Too Low) Product Pricing
Ever look at your statement of cash flow and see your company’s sales figures as negative?
A company that has a negative cash flow can cause its sales to fall below expectations.
Too high (or too low) product pricing can also be a big reason for a business’s poor cash flow.
For example, a business may overprice its products or services to attract customers. Or it may underprice its products or services and attract customers with low margins.
Either way, the business ends up having less cash than it needs to stay in business.
5. Too Much Inventory/Stocks
An actual cash flow problem is when you purchase too much inventory or stocks. Here, too much inventory can lead to poor cash flow because it may not sell quickly enough.
This can be bad if you buy the inventory at a high price and has to be stored in a warehouse or storage facility.
This can lead to high warehouse or storage costs and may make it difficult for the business to earn enough money to pay its bills.
To fix this problem, we recommend that the business sell off any excess inventory that is not needed immediately.
The business can then use the money it earned from selling off these items to pay bills, such as its rent or utilities.
6. Too Much Overhead Expenses
We can attribute poor cash flow management to too much overhead expenses. This is especially true when a business is just starting out.
The startup phase is expensive, and you will have to invest in a lot of things that you may not need at the moment.
Once your business has been running for a while, however, you will see the benefits of having lower overhead expenses.
This allows you to save more money for your future growth and expansion plans.
7. Unplanned Expenses
Unplanned extra costs can have a negative impact on your cash flow and may mean that you will have to reduce your spending.
You can avoid unexpected expenses if you have a good cash flow forecast.
If you don’t, you could end up having a huge amount of unexpected expenses, which can be detrimental to your business.
An example of an unexpected expense would be a breakdown in your production system, which could lead to you having to pay an unexpected repair bill.
Photo by Steve Johnson on Unsplash.
8. Late Payments
Late payments can also be an issue for many businesses. If a customer doesn’t pay on time, the business is at risk of losing a large amount of money.
It’s important to remember that this doesn’t just mean missing a payment, but also failing to collect a payment that customers have already made.
This can happen if you don’t give notice to the customer or they are unaware that they have to pay.
If you are dealing with late payments, you need to make sure you are getting paid as soon as possible. Cash outflow and inflow are both important in managing cash flow.
You should work with your clients to get paid as soon as possible, and you should also have an effective system in place for collecting payments.
This will help you get paid on time, which will help your cash flow management.
9. Unpaid Invoices/Debts
The top cause of poor cash flow is unpaid invoices and debts. As a business owner, you will have bills to pay and your vendors are likely to send you invoices at some point.
However, many businesses fail because they do not have the cash flow to pay their bills on time.
It’s not always the fault of the business owner, but it is something that needs to be managed well in order for a business to be successful.
The best way to do this is by developing a good cash flow management system in place.
10. Low Profits
Positive cash flows won’t happen when the business is making less money than it spends.
A great way to ensure that you don’t run out of cash is to keep a close eye on your profits. If your profits are low, then it is likely that you will be short of cash.
To sustain your business and meet all of your financial obligations, you will need to have a profit margin.
Photo by Steve Johnson on Unsplash.
Don’t Fret Upon Your Financial Statement
Your income statement reflects your business’s financial situation, including your revenues, expenses, and profits.
Use this information to help you determine the amount of cash you need to maintain your business.
When you have a negative cash flow, you need to increase your cash flow. The best way to do this is to increase your revenues and reduce your expenses.
If you have positive cash flow, then you can use the surplus to reduce your debt or invest in growth projects.
Our blog, WorkDeputy, is all about helping business owners to manage their cash flow.
We’ve got a great post on how to handle your cash flow, and it’s a must read for anyone who wants to make more money in their business.
You can learn more about this by visiting our blog today!
