The Negative Cash Flow Problem
A few years ago a study was done on the financial status of companies filing bankruptcy. Over 50% of the companies that filed bankruptcy showed a year-end profit! It wasn’t profitability that created their problems, it was cash flow. They lacked sufficient liquidity (cash) to pay their creditors based on agreed upon terms or contracts. Profitability only indicates that your sales were sufficiently larger than your expenses but it doesn’t mean that you received the income at the right moment to cover the expenses.
Diagnosing your causes of CASH FLOW problems quickly, gives you a chance to get the revenue stream flowing again. Here’s where you should look for your cash flow issues so that you can create a solution.
Customers that don’t, won’t or can’t pay their bills
SLOW PAYING ACCOUNTS
Customers that do not pay as agreed and end up using you for an interest free loan
DOWN-TURN IN REVENUE
Loss of some of your accounts creating a sudden decrease in sales
INCREASE IN EXPENSES
A sudden increase in the cost of doing business such as, skyrocketing fuel costs, unexpected equipment repairs, increased insurance premiums, uninsured costs from damage claims
SUDDEN OR RAPID GROWTH
Rapid growth with an increase in overhead which is due prior to receipt of revenue generated from those sales
Not having and cash savings or safety net when unusual demands for cash occur
USING CASH OR SHORT-TERM FINANCING TO PURCHASE LONG-TERM ASSETS
Using cash or short-term financing to acquire an asset that should have been purchased with long-term debt (resulting in lower payments and therefore a reduced impact on cash reserves)