Every business has their ups and downs, and so it’s not uncommon for some companies to find themselves facing cash flow problems. If left to escalate, cash flow problems can cause a company to become insolvent, which is why it’s important to address any signs of trouble early on. It’s important to know the main causes of cash flow problems in order to prevent them from materialising and becoming a major issue for your business. These are the main causes to look out for:
Poor Financial Planning
One of the main causes of cash flow problems in business is poor financial planning. Working to a detailed financial budget and plan is essential for preventing businesses from spending or borrowing outside of their means. A central part of this is maintaining accurate bookkeeping to ensure you are keeping track of your business’ finances and are able to spot any signs of trouble early on. Poor budgeting is one of the main causes of cash flow problems, as it prevents issues from being spotted early on, whilst potentially allowing debts to accumulate.
Loss Of Contract Or Customer
Whilst many causes of cash flow problems are preventable, some issues may arise that are a little harder to avoid. One of these is when a company loses a large contract or customer. This will have a big impact on profit, which in turn can cause issues with cash flow to arise. Contracts and client bases can fall through for many different reasons. Whilst you can’t always prevent this, ensuring your company is not overly reliant on a single customer or contract by building up a varied client base is crucial for futureproofing your business.
Overstock Of Products
Overstocking products is another one of the main causes of cash flow problems. Spending money on stock that becomes redundant is costly and ineffective, and so it’s important to avoid this in order to protect the health of your company’s finances. This can be avoided by developing a thorough inventory management system and monitoring stock levels carefully to avoid overspending, and enabling the company to make savings where possible.
Declining Profit Margins
Gross profit margin refers to the percentage of revenue that is converted into direct profit. There are many different factors that can cause profit margins to decline, such as higher supplier costs or changes in industry competition. What’s important is noticing when your profit margins are starting to decline as this is one of the major causes of cash flow problems. Keeping a close eye on your profit margins and profitability, as well as ensuring that your pricing remains competitive is essential for helping your business continue to thrive.
Late Payment From Debtors
When debtors are consistently late in missing payment deadlines, this can put a considerable strain on cash flow. It also has the potential to impact the ability of the business to pay its own creditors and employees. As consistent late payments can be one of the main causes of cash flow problems it’s important to ensure you agree clear and realistic payment plans with your debtors, and make sure you have a cash buffer to rely upon in the event that your debtors do fail to pay on time.
What Should I Do If My Company Is Facing Cash Flow Problems?
Knowing the main causes of cash flow problems is helpful in preventing financial difficulty from escalating. However, in the event that you do find your company struggling financially, there are options available. If cash flow problems are left to escalate, it is possible that the company may become insolvent. That’s why it’s important to contact professional guidance at the first signs of trouble. If you have any concerns about your business’ financial situation, please don’t hesitate to get in touch with our experienced team at Ballard Business Recovery. Looking at your company’s individual requirements, we can advise you on the best options available for moving forward.
