Cash-flow Problems: Definition, Causes & Methods

Unfortunately, many clients pay late, some taking well over the standard 30 days to pay what they owe. Waiting over two months for payment can put your business in financial danger, especially when you rely on cash for growth. You may even need to spend time and money getting outside assistance to help with non-paying customers.

Locking in an investment or loan to fund your business is always great for capital. For example, an investor or bank can withhold a portion of your funds if you don’t meet expectations or your income is much less than you projected. This can cause cash flow issues if you rely on those funds to cover major expenses, such as replacing broken equipment or responding to an emergency situation. Though you might be very eager to scale or grow your business quickly, it’s important you make sure to do so at a reasonable rate. If you overextend your company, chances are a lot of your cash will be tied up in capital and operating expenses, leaving your business less flexible in the short term.

Symptoms of common cash flow problems

Operating cash flows, however, only consider transactions that impact cash, so these adjustments are reversed. Note that CFO is useful in segregating sales from cash received. If, for example, a company generated a large sale from a client, it would boost revenue and earnings. However, the additional revenue doesn’t necessarily improve cash flow if there is difficulty collecting the payment from the customer.

Cash flow problems should be taken seriously and never neglected, as positive cash flow allows businesses to retain cash and spend when needed or wanted. If cash flow is negative, a business should refrain from spending. In some businesses, it is typical that consumers make partial payments for the services they receive. A portion of the payment is deliberately withheld to ensure the customers that all the obligations and services agreed upon will be performed satisfactorily. This is especially common in construction and other industries where there are long, complex projects to be executed. Another thing that negatively affects cash flow is having too many sales on credit.

Lesson Activity – Cashflow-Cluedoh!

In doing so, they allow them to pay later and deny themselves inflows of cash. Although costs remained the same, the reduced demand lowered revenues, making revenues lower than costs. Thus Company C stopped making profits and started making losses, which resulted in problems with cash flow. Having low profits is perhaps one of the biggest causes behind cash flow problems. While cash flow and profit are two different things, a company’s net profit has a direct impact on its cash flow. High income simply means more cash flow for the business, and low income means less cash coming in.

Now, let’s have a look at table 2, which presents an abstract of a cash flow statement for company A in 2021. For instance, using construction as the example, the amount of work performed is fully paid for by the contractor; however, a part of the money is withheld. Cash flow problems can cause major interruptions for small and medium-sized businesses. For this reason, it is best to understand, identify and manage the top causes of cash flow problems.

How Cash Flow Works

Discover how to collect late payments from customers and the measures you can take to prevent them. Carrying bad debt can quickly become burdensome and a cause of https://www.bookstime.com/articles/cash-flow-problems. Not only does it monopolise resources, but it can also hinder forecasting and the bottom line. Calculating cash flow is simply a case of comparing the money you have coming in with your outgoings. If the first number is bigger than the second, then you have positive cash flow, if not, you need to reassess. Zach Lazzari is a freelance writer with extensive experience in startups and digital advertising.