Cash Flows Problem and Causes

Cash Flows Problem and Causes

Cash Flows Problem

Managing a company’s cash flow is a very big challenge. There are many factors you need to keep in mind while managing the cash flows. Any kind of loan, purchase, deal, strategy affects the cash flow in one way or the other. It is so important that legal advisers are consulted. Proper strategies are planned out just to keep the cash flow in check. A company’s cash flow reflects many operations of the company. Cash flows problem arise when incoming money in a company is lower than the outgoing money. There are many reasons as to why cash flow problems arise. It can be due to over investment, losses, poor handling of receivables and payable, flawed business plan and so on. However, these reasons are most likely to arise in some specific types of business. These types of business which are prone to cash flow problems are mentioned below.

A small business or a startup is quite obviously the most prone to cash flow problems. It is because of the invisibility of the company and less experience of the owner. Not maintaining a cash flow budget from the starting or spending too much are some of the results which finally lead to cash flow problems. Also, startups are very prone to losses or low profits. It, therefore, results in an imbalance in the cash flows. Hence, it is quite common to see startups and small business suffering from cash flow problems. A proper forecast is required. Everything may seem jittery and flowery in the beginning which leads to ignorance. Ignoring smaller yet important aspects like credit and stocks can cause serious cash flow problems. Therefore, everything needs to be sorted and planned beforehand. Consulting legal solution providers and advisers is strongly recommended for start-ups. Basically, the experience is what a startup requires. Everything from planning to strategize to effective implementation will come along with it.

Also, other than start-ups there is few more business who are prone to cash flows problems. Other than business which has a flawed business plan and has communication problems, businesses that are expected to face cash flows problems are:

A business which is dependent on one or two customers only as their major income source: Customers are undoubtedly the main source of income for any company. However, depending upon one or two customers only can be a big issue. Reasons, like lagging behind the payments or leaving the company unexpectedly, can lead to an imbalance in the cash flows. An equal dependence on customers, having more major customers and strict collection schedule can help you under such circumstances. Other than that, don’t leave the smaller accounts under any circumstances because they too contribute to your cash flows. Also, they will save you from getting completely bashed if a major customer leaves you unexpectedly.

Business depending upon only one service or one product: There is so much competition in the market nowadays. Not to mention the increase in start-ups on a regular basis. There is no doubt that there are going to be many companies providing same services or products or something on similar lines as your company. In such circumstances, you cannot rely on only one product. With upgrading and updating, diversifying is also important. Your product may be completely different; however, there is no harm in having a co-product. It will even help you increase your cash flows. More investment will lead to more expansion and profit.

An unsteady business: Everything has a right time. You cannot have dinner in morning or breakfast at the night. Similarly, there are some products and services you can use only at a particular time. The business associated with such services is called seasonal business. They have a specified season where they see a lot of sale and profit. However, once their season is over their sales drop down. In such case scenario, relying on more than one product or creating a business plan such that it absorbs the unsteadiness of your business is recommended.

At last, a conclusion can be drawn that cash flows being an important component of business cannot be neglected. Hence, you need to tackle cash flows problems and manage your cash flows. Smart mind, effective strategies, advice full of experience, financial help and management is what you need to maintain your cash flows.

Common Causes

Cash flows are quite common as well as important in the financial world. It refers to the amount of money a company holds. This money includes the assets and liabilities also. However, this value is measured quite differently. Basically, you measure all the transactions made in a financial year. These transactions are those transactions that affect the liquidity of a company. This way many operations of the company are highlighted. These operations include sales and revenue, tax payment, the cost of goods, capital requirement, development expenses and operating expenses. Precise data with a particular time frame is required to calculate the cash flows accurately. All these operations altogether make cash flows a very vital component of the business world. Therefore, it is important to maintain the cash flows. Before that, you need to have the knowledge of cash flow causes which lead to problems so that you can tackle those problems. Some cash flows problems are discussed below.

Before discussing the causes of cash flows problems, what do we exactly mean by cash flows problems? Cash flows problems refer to the case scenario when a company spends more than its income. That is incoming money is lower than the outgoing money. It causes many difficulties for the company. The inability of paying the debt, decreased the value in the market, the disturbed budget plan is few results of these problems. Causes for such problems are as mentioned below.

Low Profits or Losses

When a company creates strategies, it sets a goal, a short-term goal. Generally, a certain amount of money to be achieved before a certain amount of time is set as a short term goal.  But when the goal is nowhere near completion, it is considered to be a low profit. If there is more outgoing capital than incoming, it is considered to be a loss. Both of them are very common, especially for startups. Saving yourself from low profits or losses can be a bit challenging. But maintaining a proper forecast and strategizing every move can be beneficial.

It may happen that a company invests in equipment or other schemes which are beneficial but only for a short period of time. The investment can even be made on completely useless materials. This leads to over-investment. To tackle this particular cause you need to be smart. You need to know what you need and what you don’t. You need to keep your budget in mind.

Too many Inventories

Overstocks and inventories can block the incoming cash. Not to mention, that storing it for a long time may lead to its damage or expiry. Therefore, you need to release stocks regularly. Keep a limited stock.

Poor Collection of receivables

It sometimes happens that customers lack in their payment. Even sometimes, companies ignore this delay in payment. But you need to understand that over-credit can imbalance your cash flows. Therefore, a proper time frame should be given to the customers. No delay should be allowed. A strict collection timetable should be followed.

Low Sales

There are times when your sales are not as good as you have expected. When this type of situation occurs, it’s a signal that you need to step up your game. Your product may need some improvement or you need to plan your marketing strategies in a better way. Attract your customers. Make them feel that they need your product and not the other way round.

Lack of understanding and communication, Flawed business plan, and strategies and Low gross profit margins are few more common causes of cash flows problems.

It is very important to understand these causes and act in such a way that they can be tackled. Maintaining company’s cash flows is very important for the development and success of the company.

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