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How to Identify When Your Business Has a Cash Flow Problem

Business Loan Articles > Article: How to Identify When Your Business Has a Cash Flow Problem

Cash flow is essential to any business' growth and continued long-term success. Business owners should always maintain a firm grasp on their cash flow and be able to describe and predict their firm's cash flow situation for the week, month, and year. A focus on cash flow health can prevent late payments to vendors, eliminate or reduce the need for expensive financing options such as overdraft accounts, and provide a company with security during tough markets.

Are occasional cash flow problems a serious issue? Sometimes our liquidity is fine, but at other times we barely have the funds to make payroll.

Many companies have periods of feast and famine with their cash flow. In fact, most businesses occasionally experience cash flow problems.  Some highs and lows are common; however, if you have extended periods of insolvency, your business' cash flow may be a serious problem that needs to be addressed immediately.

How can I tell if my company has a serious cash flow problem?

The following are common indicators of a long-term cash flow problem that needs to be resolved quickly:

• Credit accounts and lenders frequently receive payments more than 90 days late
• Business cheques are regularly bounced by the bank
• Vendors mandate the company utilize cash-on-delivery or refuse supply
• You use post-dated cheques to pay vendors on a frequent basis
• Payments to creditors are often made for sums that do not match a specific bill or invoice
• BAS payments are frequently late
• The business has defaulted on loan obligations
• Your employees' superannuation is unpaid or significantly delinquent
• The company's overdraft facility limit has been reached

What are the main contributors to cash flow problems?

The main sources of poor cash flow are:

• Creditors
• Excessive or mounting debt
• Debtors
• Too rapid growth
• Over-investing
• Excess slow moving stock
• Changes in the market

My business has been less than great lately, but the cash flow is still fine. How can I tell when trouble is on the horizon?

The following are warning signs that may indicate future cash flow problems:

• Your losses are mounting, as is your business' debt
• Your company does not have a business plan, budget, or cash flow forecasts for the upcoming year
• Corporate stock is not selling well
• Debtors are not paying their balances in a timely manner
• Your financial records or internal accounting methods are in disarray
• The business is struggling to pay its creditors
• There are summonses, warrants, judgments, or other demands pending against the business
• The shareholders are unwilling to raise funds
• The company's taxes are late
• Suppliers are filling more complaints
• Employees and managers seem to believe that a big job or contract will appear on the horizon to rescue the company

How can I improve my company's cash flow issues before they become a serious problem?

Addressing the issue is the first step. Once you recognize potential issues with your company's cash flow, you can begin taking steps to improve the firm's solvency. The following tips can help you stabilize cash flow:

• Create a system to bill customers for goods and services promptly, shortly after goods or services are delivered.
• Filter customers in the beginning to avoid payment problems in the future. Do not do business with customers who have had problems with previous suppliers.
• Entice customers to pay promptly with incentives.
• Limit inventory to save money. Bundle slow-moving stock to clear space for more profitable merchandise.
• Combine business debts with a consolidation loan.

Why is cash flow so important?

Healthy cash flow is essential to a business' long term prosperity and continued existence. Businesses with an unstable cash flow can experience liquidity issues, have insufficient funds to pay creditors, and restrict their company's ability to expand and grow in the future.

Is there a long-term approach to help prevent cash flow issues before they arise?

To prevent insolvency or going under, every business owner must make cash flow forecasting a central element of their cash flow planning. Decision makers at the company must be able to identify their firm's cash flow status on a daily, weekly, monthly, and yearly basis in order to make informed and educated decisions for the company. Keeping a company's finances in order and its cash flow healthy is essential to creating a business with staying power.

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