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Preventing Cash Flow Problems
Cash flow is the measure of incoming and outgoing funds. However, it’s important to remember that cash flow isn’t the same as profits. Having a large amount of unpaid purchases in accounts receivable may seem profitable on paper but can put your business in a risky situation if your suppliers demand immediate payment.
Product-based businesses that are growing and profitable can be particularly vulnerable to cash flow problems. Every time you gain a new customer, you have to purchase raw materials before you get paid.
To prevent cash flow problems and improve your overall cash position, consider the following steps:
1. Maintain Accurate Cash Flow Forecasts
Keep your cash flow forecasts up-to-date to navigate business uncertainties. Reflect on last year’s sales to project this year’s revenue. Adjust your projections when substantial new orders come in, considering the cost of producing goods and services.
Include fixed expenditures such as rent, bills, salaries, and taxes in your forecasts.
2. Continually Compare Projections to Reality
Regularly compare your forecasts to your actual figures. Fine-tune your projections on a month-by-month basis to predict your cash availability in the future.
3. Prepare Multiple Cash Flow Projections
Protect yourself from unpleasant surprises by preparing best-case, worst-case, and middle-of-the-road projections. Assess market trends, potential threats from competitors, and customer satisfaction to produce these projections. Keep them updated based on changes in your financial situation.
4. Keep Things Realistic
Avoid unrealistically optimistic forecasts. Be aware of potential problems and address them promptly.
Symptoms of Common Cash Flow Problems
Identifying cash flow problems can be challenging, but understanding the symptoms can help you avoid them. Watch out for the following signs:
1. High Accounts Receivables
Monitor your unpaid invoices and payment terms. A high accounts receivable balance without increased cash flow indicates a need to reevaluate your invoicing system and payment policies.
2. Excessive Inventory and Low Sales
If a significant portion of your cash is tied up in inventory and sales are slow, it can hinder your cash flow. Consider the costs of storing inventory and the risk of obsolescence.
3. Overextending Your Business
Growing your business too quickly can strain your cash flow. Carefully plan and budget for growth, regularly reviewing your financial statements to gauge your company’s financial health.
4. Declining Sales
Declining sales can lead to cash flow problems if overhead costs remain constant. Analyze the reasons for declining sales and adjust your strategy and budget accordingly.
If you notice these symptoms, examine your business performance and develop a plan to address them.
Improving Cash Flow
If you find yourself needing to improve cash flow, explore solutions such as financial oversight and seeking lines of credit. Refer to our article on improving cash flow for more information.
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