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How to Prevent Cash Flow Issues

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Good cash flow is one of the major parameters for healthy business, which is why entrepreneurs need to react to any issues in this area before they become problems and jeopardize company’s growth. In this article we review some of the major cash flow problems companies are dealing with, and provided the best possible solutions entrepreneurs can implement.

Prices Are Not Up to Date
Most companies set prices for their products and services the moment they add them to the offer and don’t change them for months and sometimes even years. Prices mainly depend on production costs, market trends and competition, which are parameters that constantly change. Therefore company’s product can lose its competitive edge if prices are not up to date.

Best way to check if prices are up to date is by making profit margin analysis and separating clients in three groups depending on their ability to purchase the product at a higher price. In addition to this entrepreneurs also need to follow rival offers and adjust their prices in accordance to current trends and special dates like: Christmas, Black Friday, etc.

Expenses Are too High Comparing to Sales Volumes
Beginner entrepreneurs usually never have this problem due to their diligence to evaluate every unnecessary cost. Small companies also don’t have the need for big office space, extensive hiring, raw materials in stock, etc. All this comes with company’s growth, and one day expenses can grow record high.

Companies should deal with this problem with implementing austerity measures. They should also question all of their expenses and divide them into three groups:

  • Staffing Expenses;
  • Capital Expenditure;
  • Facility Costs.

All expenses that are not necessary for maintaining company’s business at the highest level should be called off. Entrepreneurs also need to negotiate better prices from their raw materials suppliers and office landlords or search for more affordable options in both of these sectors.

Sales Are Low
Few months of low sales can put company’s future in danger, because many small businesses invest large parts of their revenue in buying raw materials, paying off their employee’s earnings, etc. Sales can drop to record low in matter of days, which leaves entrepreneurs with very little time to react.

In case of their company’s sales rates are decreasing, entrepreneurs should rethink their pricing policy, invest more money in product or service promotion and launch different kind of promotional campaigns that should include: sales, discounts, special coupons, promotional prices, etc.

Cashflow-problems-infographic

Infographic Source : http://www.business.vic.gov.au/money-profit-and-accounting/financial-management-set-up/infographic-cash-flow-analysis

Big Surplus
This problem mainly targets production or retail businesses. Many entrepreneurs are being very optimistic when buying raw materials or goods they are about to sell, which leads to piling huge surpluses, that ties big part of their earnings. In addition to this they need to pay for raw material or goods storage and companies that are into production or reselling of perishable products have even bigger problems in their hands, since they can end up with huge stock of products with expired dates.

Inventory levels need to be carefully monitored, which guarantees that company will never have their key product out of stock or end up with huge piles of surplus products or materials. Stock items should be kept stored for the shortest possible time before being used or sold.

Debt Recovery Problems
Many entrepreneurs have problems with slow paying invoices and debt recovery. Most companies offer from 30 to 60 days for clients to pay their invoices, and after that they start cutting off services and scheduled deliveries and reminding clients to pay their debt with: e mails, phone calls, letters, visits, etc. Unfortunately sometimes these company efforts are unsuccessful and they need to settle client’s debt in court, which can delay payments for long periods of time.

In situations like these, it is advisable to hire a respectable debt recovery agency that will collect the debt and take their share. This option is much more efficient and affordable than settling debts in the court of law, and since letters, e mails and phone calls don’t work well in case of bad debtors, in most cases this is the only way creditor can recover at least some part of the debt.

Bad cash flow is far from being the only problem that can stop company’s growth. Entrepreneurs also need to keep their staff policies up to date, introduce more efficient means of marketing, diversify their offer and much more. But since all these moves require funding, keeping cash flow at the highest possible pace is crucial for implementing all other growth strategies.

One Comment

  1. Cash Flow Insolvency - How To Avoid It - WANEntrepreneur

    December 23, 2015 at 12:12 pm

    […] to have a 120-day cash flow forecast (which should be refined with time). When you make an accurate cash flow model, it will be easier to spot the patterns, and thus make more precise financial projections. […]

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