Solving Business Cash Flow Problems

solving cash flow problemsSolving Business Cash Flow Problems
Typically cash flow problems are caused by a business spending more than its revenue on a regular basis. Negative cash flow can cause a business to flounder and eventually head for the bankruptcy court.

Too often, a business owner will use cash infusions in the form of loans to try to solve their cash flow problems, but a business cannot borrow its way to solvency. Fixing the root cause of the cash flow problems is the only way to put a firm financial foundation under the company to keep it operating in a financial crisis.

There are temporary solutions, like selling equipment and then leasing it back. In a lease agreement, the business will pay for the depreciation of the asset. Buying the equipment outright can be more cost effective, but in this case the business is paying in advance for the lifetime use of the equipment.

A business with substantial receivables can factor their invoices. Factoring is selling the invoices for less than they are worth in exchange for immediate cash. Factors base their agreement to factor on the credit worthiness of the customer of the business rather than on the business itself. For example, if the business is in a negative cash flow position, but is selling to a major company with a good credit rating, like Wal-Mart, the factor is more likely to agree to write the factoring deal.

Ultimately, the only way to permanently solve cash flow problems is to sell profitably and increase the speed of the cash flow arriving – getting customers to pay faster. Offering a small discount for faster payments, or for paying with cash rather than using a credit card can be effective in increasing cash flow. Offering terms for only very large orders is another way to get cash flow in from smaller order customers. Firm financial policies can be written to ensure that profits are not being given away to every customer.

Depositing checks and cash into the bank on a daily basis rather than holding the cash for a few days can effectively cut down on the chance of overdrafts. Overdraw charges can eat away at profits very quickly and can contribute to cash flow problems.

Monitoring costs of inventory and raising prices accordingly keeps profits in the company, and reviewing financial statements for cost-creep on a regular basis can alert the business owner to cash flow problems early. Use your monthly financial statements as an early warning system.

Finally, allocating some cash flow to reserves to cover emergencies and long-term financial goals is one way to permanently avoid cash flow problems. Consistently paying off debt is another way. This becomes simple with a weekly cash flow management software system like Cash Flow Mojo® and allows a company to run tight control on the cash flow. It is how the company deals with cash flow problems that determines whether it can survive and enjoy prosperity.

Solving Business Cash Flow Problems

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