Even businesses that generate sizable business can experience cash flow problems. Growth may occur faster than the company can install systems and procedures. Expenses can rise too quickly or the company can take on too much debt or have interest rates that are too high. Companies can experience cash flow problems for a variety of reasons.
Streamline Company Cash Flow
Negative cash flow occurs any time your company’s cash outflows exceed its cash inflows during the time period in question. If you do not closely monitor your company’s operations, expenses can quickly rise and eclipse revenues. You can acquire assets too quickly. Your company’s cash flow statement breaks cash flow into three segments: operating, investing and financing. Since the cash flow statement sums these segments, all of these areas can contribute to or alleviate cash flow problems.
Tweak Receivables and Payables
One problem that many companies experience is slow paying customers. If your customer does not pay you until 60 days after you provided a service, you had negative cash flow for that customer for 60 days. Cash coming in from revenues must exceed cash flowing out to expenses.
One recommended action is to structure contracts or proposals so customers must prepay or provide a deposit for goods and services. An alternative is to structure invoices to politely demand payments in 10 days and encourage your staff to call or email customers on day seven with reminders.
Resolve Improper Operational Issues
With improper operational issues oversight your expenses can quickly escalate. One way to resolve this operational issue is to require the use of purchase orders for all orders in excess of certain amount and demand written approvals for higher amounts. You can restructure contracts or increase prices if your company is not making enough money on its services. Also, you can revamp your sales incentive structure if your current structure encourages salespeople to drastically reduce prices.
Another driver of cash flow problems is debt-related payments. These include excessive interest payments, large principal payments or significant debt repayments. For example, if your company has a $20,000 loan repayment due in six months but you have insufficient cash on hand to pay it, you have several options to resolve this debt-related cash flow issue. You can approach your lenders to reduce your interest rate or restructure your current payment schedule. You can request the lengthening of the term of your loan.
Manage Debt Issues
Another way to resolve debt issues is to seek new debt with better terms to pay off existing debt. Alternatively, you can find a friendly investor to inject equity that pays off the debt, thereby replacing debt with equity.
Reviewing your balance sheet and cash flow statement on an ongoing basis will help you identify these problems well in advance and give you time to pursue the alternatives that work best for your company. Many businesses struggle to drive more cash flow. If you’re not getting as much as you’d like, these five strategies will help.
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