Cash Flow – A Business Problem
Cash Flow – A Business Problem
A whopping 70% of all businesses that fail each year can attribute their woes to one simple thing: cash flow. From small businesses to large chains alike, cash flow management is a challenge that can make or break a business. Some business owners attempt to brush the problem aside by throwing money at the problem, but that doesn’t address the root of the issue. Instead, the same problem crops up the next time bills come around. In order to solve this problem, it is essential to understand the fundamental business principles that make companies tick.
Receivables, Inventory, and Overhead
When companies struggle to manage their cash flow, there is generally an issue with one of the following: receivables, inventory, or overhead. Some companies simply have too much cash tied up in receivables, meaning the business owner is constantly waiting for payments to roll in for services or goods that were delivered long ago. Inventory problems arise when too much capital is tied up in the goods sitting in stock, waiting to be purchased. Finally, an overhead issue is the result of a company paying too much to operate their business, without recouping enough of the cost.
Addressing the Issues
Hurdling over the challenges that lead to cash flow problems is generally quite simple. For example, if receivables are constantly posing an issue, work to find a way to get that cash in the bank sooner. Some businesses offer a discount to customers who pay their bill before the term expires, whereas others contract receivables out to a third-party who pays the bill immediately and handles the billing of the client. If overhead is constantly posing a problem, worker wages are too high, or products are not priced correctly.
Combating a Weak Margin
If the three issues outlined above are not to blame for a cash flow problem, there is really only one other potential culprit: a weak margin. This can be a catastrophic issue for businesses, particularly in a weak economic climate. The only way to resolve the issue is to either raise prices or cut the base cost of products or services.
Feedback from businesses who have found themselves facing a traffic downturn due to economic circumstances correlates with what many experts have long suggested: discounts used to lure new customers rarely take profit margin into consideration. Without paying close attention to this vital element of a company’s profitability, businesses are likely to find themselves running on empty. Regardless of how the issue is ultimately resolved, the business can not operate long term with a weak margin in place.
Cash flow has the power to ultimately derail a company if it is not managed effectively. Rather than becoming a statistic, companies facing these problems must learn how to swiftly address the issues they face in this department. Ultimately, resolving a cash flow problem is a matter of carefully analyzing the cogs and wheels of how a particular company operates, in order to pinpoint the weak area. Once this has occurred, the broken link in the chain can be targeted efficiently.
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