Look At The Causes Of A Decrease In Cash Flow
A decrease in cash flow is a danger to the financial stability of your business, and at worst, it can sink your business. If you are consistently spending more money than you have coming in, you need to address it for the well-being of your business. But first, you need to look deeply into the most common causes of a reduction in cash flow. Together, we can fix them.
Why Your Business Encounter A Decline in Cash Flow
Cash is the key driver of your business, and many things are connected with it that can increase or decrease its flow. If your company is facing a negative cash flow or a decline for a while, investigate the following areas that contribute to your company’s finances.
Your profit is your fundamental source of positive cash flow, which you get as payments from your customers or through selling assets. If your business is unprofitable, you won't be able to cover your expenses, and it will dig holes into your cash flow and lead you to borrow more cash. You'll get low profits if your sales and marketing operations aren't working well, are experiencing low staff productivity, and are involved in high and uncontrolled spending.
Spending money on things that your business doesn't really need will only drain your funds and lead to a decline in your overall cash flow. And this over investment habit will put you in a situation in the future when you won't have sufficient cash to purchase items that are critical to your business.
Expanding too fast
Expanding your business too early without a concrete plan or sufficient money can put you in danger. If things are going well, you might think to increase your retail orders even with a lack of resources, which can negatively impact your cash flow.
These are the things that you didn't foresee and include in your cash flow projections, and you aren't in the situation to allocate money for them. So, if you spend money on unexpected expenses even if you have enough money on hand, it might put a strain on your cash flow.
Excessive inventory can tie up significant amounts of money and put you in a negative cash flow position. Overstocking directly impacts the movement of money in and out of your business. Moreover, products that stay on shelves for too long occupy costly warehouse space and can be at risk of becoming outdated, making you less profitable.
Poor financial planning
Poor cash flow forecast and inappropriate budget planning beforehand will likely lead to cash shortages and put your business in serious financial difficulty. If you're following a negative cash flow business model, your overall cash flow will decline no matter if you have a great financial plan and an accurate forecast.
According to an SME snapshot from MYOB, late payments are one of the major causes of an unhealthy cash flow cycle. If you set a 60-day payment term for customers but get paid late and pay your rent, utility bills, and other overheads weeks before you receive the money, you'll always be going behind.
Get Advice From ScottValleyBank
Cash gets tight when times get tough, but it remains the King of your business Kingdom. When you feel that your cash flow is declining and it’s getting difficult for you to sustain your business, seek help from our finance experts. They will help you ride out the storm safely and ensure that your cash flows keep flowing.