The statement of cash flow is pretty much the culmination point for financial accounting. Its preparation can be very simple for some companies and highly complex for others but this preparation is important in order for the company to perform cash flow analysis.
Cash flow analysis is an important exercise for any business to ensure its viability and competitiveness in the market. Without this, a business will have no idea whether or not it is still profitable and whether or not it still has the ability to pay its obligations.
Companies both big and small, startups or established, experience cash flow problems once in a while. Some more than others.
In this discussion, we will look at the 4 most common causes of why some businesses experience cash flow troubles
- Excessive Aging of Receivables
Some businesses in an attempt to not strain any relationship with their customers or partners choose not to ask others for their money. It is an uncomfortable conversation for some but the truth of the matter is, this has a huge impact on the business.
Another possible reason for poor collection of receivables is poor control of the invoices that are due. For many businesses, organizing and keeping track of the account receivables is a manual endeavor and so it is prone to errors. Companies with cash flow planning or forecasting software are off to a much better start than those that manually do it.
The payment that any business can get from the receivables is cash for the business which is why it is important to keep track and make the collection more effective to avoid negative operational cash flow.
- Expenses are too high, Sales is too Low
Sales always has an effect on a business´ cash flow therefore if the sales is too low, it is good to immediately look at low hanging fruits for any business – meaning sales that can be easily made for the business such as upsells to existing customers or increase in customer loyalty initiatives to reduce churn. Perhaps even more important is that analyses must be done on what the root cause of the low sales volume is.
It is also very important to look at the P&L statements especially on staffing, CAPEX, and OPEX because constantly high expenses with constantly low sales volume is not sustainable for any type of business.
- Wrong Pricing
What many businesses do when they start up is that they bring their pricing down in order to attract the competition’s customers.
After a few months or years, the pricing increases by small margins but no one really stops and ponders whether or not the pricing is correct given all other factors involved both in production and the market situation. Therefore, companies that do not take time to properly reassess their products ‘pricing and gross profit margins are companies that experience cash flow troubles.
- Heavy Indebtedness
A business that incurs too much debt is very likely to experience cash flow troubles as this puts a significant strain on the cash flow.
This is one of the reasons why cash flow analysis is an important exercise, some businesses may not realize how much cash is drained from debt repayments especially when large amounts of repayments are due.
Is your company experiencing cash flow troubles? What do you think are the reasons?
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