Cash flow problems can be quite distressing to business owners and managers, especially when bills go unpaid. Common cash flow problems include the inability to collect unpaid accounts receivable, too much inventory and low sales, high unexpected business expenses, and overpayment to employees. While many other issues can exist in a company, these are among the problems that can occur in any business that will create negative cash flows.
Accounts receivable allows customers to purchase goods at the present time and pay outstanding balances later. Companies may vary their accounts receivable methods by requiring a down payment on the goods or services with the owed balance to be paid within 30 days, or offering a small discount to customers who pay early. Cash flow problems begin when the company offers credit to questionable customers who cannot pay their accounts receivable balance. The further behind customers fall — such as 60 or 90 days on open balances — the less likely the company is to collect the money.
Inventory is often the second largest expense for companies. Most businesses purchase inventory items to stock on shelves in hopes of selling the items to customers. Unsold inventory is lost capital. Even though the company may use accounts payable (credit purchases) to buy inventory, it will have to pay suppliers and vendors for the goods. This creates cash flow problems, as the company must pay for inventory without generating cash from sales.
Unexpected business expenses can come from a variety of areas or functions. For example, a vehicle may break down, resulting in large unplanned expenditures for the business. If the company spends all its capital reserves on this repair, any other unexpected expenses can create cash flow problems for the company. Small businesses often face this problem, as they have lower cash reserves than other companies. Additionally, the company may need to draw on a credit line in order to finance these unexpected expenses. This increases interest payments for credit line draws, resulting in more cash flow issues.
Employees are the number one expense for most businesses. Companies who hire too many workers or overpay employees for job functions will have cash flow problems. Business owners and managers may think they need to pay higher wages to bring highly skilled workers into the business. If these workers do not live up to the expectations of increased revenue or increased production time etc., however, the company is overpaying for the completed work. This will result in high expenses and fewer products to sell for recovering expenses.