Small And Home Business

How to Solve Business Cash Flow Problems



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Temporary cash flow problems can happen to any business, large or small. More serious issues with cash flow also happen, though not by accident. There are solutions.

A cash flow problem is easily defined, cash on hand is less than the cash needed for expenses. The business cycle accounts for many of these temporary problems. Invoice terms are net 30, meaning that cash in will arrive in thirty days or more. However, cash out, the expenses for cost of goods and for payroll, will not wait for the invoices to be paid. Absent a surplus of cash, someone may not get paid.

One solution is to manage payables. Some suppliers are more important than others. Some bills are more important than others. Work with suppliers and communicate that they will be paid, just not on their terms.

Another, more long term solution is to change your invoicing terms. Net 15 days reduces the potential for a cash shortage. Your customers may not agree to support such changes, though, and you risk losing customers.

A line of credit from a bank is one of the best ways to solve cash flow problems. Banks will want to see a number of financial reports and assess overall cash flows to ensure that they will be repaid. They may ask the principals in the business to sign personal guarantees. Most lines also require a period of time each year without a balance due, usually a month with the line paid off and unused.

Using credit cards can be a quick fix for the lack of cash. Putting payables on a company or personal credit card moves the due date for payment into the future. In addition, credit cards allow partial payment of the total card balance so that less cash is required for bill payments. Interest charged on balances can be far higher than a line of credit. The potential exists for the creation of a massive amount of debt with little prospect for payment.

Factoring can assist with cash flow issues. This is the sale of the business's accounts receivable to a third party for cash. The factor will examine the receivables, exclude those they feel are not going to be paid and only purchase the best of the business's debt. The final price paid by the factor will also be discounted up to 20% so the business will not receive the total invoice amount. This is often a last ditch solution to a long term cash flow problem because the factor never provides 100% of the invoice amount so the business loses money on the transaction.

The most serious cash flow problems are created by the failure of the business's principals to provide enough capital when the business is started. Part of any sound business plan should be a serious and conservative estimate of cash flows. It is not uncommon for business owners to have to provide fresh injections of capital, cash, one or more times during the start up years of any business. The need for fresh capital should be planned for and not come as an unpleasant surprise.

All businesses will have cash flow problems at some point. They can be handled and the business can continue to grow despite them. Business cash flow problems should be temporary as should any solutions. Long term problems suggest that something is wrong in the business model that requires fixing.

More about this author: Charles Simmins

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