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Warning: How Cash Flow Problems Can Sink A Profitable Business

15 April 2018 No Comment

One business phenomenon that always baffles the public is hearing about how a well-run, successful company can go bankrupt. The most common explanation is something that accountants understand only too well.

It’s called a cashflow problem.

A business can run into financial trouble when its bills arrive ahead of the money it expects from its customers. A company can’t stay in business if it doesn’t have the money to pay its workers, cover its rent, keep the lights on, or manage its other overheads. The money necessary to operate the business just isn’t there—even if, on paper, the company is earning more than it’s spending.

A negative cash flow problem, then, is a situation that arises when outflow happens before inflow. It’ s a common dilemma faced by truckers, restauranteurs, and manufacturers.

Trucking

Many new trucking companies go out of business before the end of the month. Since customers expect 30- to 60-days credit on their accounts, cash flow shortage can often occur when owning a trucking business. Business owners find that they don’t have the cash necessary to cover accounts payable expenses like truck repairs, fuel costs, and payroll.

New trucking operations that survive the lean start-up phase before accumulating enough reserve capital to handles their expenses use factoring to manage their cash shortage. They may use a service like TBS Factoring that buys their invoices so that they can pay their bills as soon as possible.

Restaurants 

Although restaurants are paid immediately by customers after a meal, they, too, often have negative cash flow problems. These are due to a variety of causes like having too much stock or too much food spoilage. Cash flow problems may also arise due to low profits or a high staff turnover rate.

Restaurants that thrive learn to keep close tabs on money flowing in and out of their business. They diligently slash their operating expenses to avoid getting caught short when it’s time to pay their suppliers and their staff.

Manufacturers

Some of the most common reasons why manufacturers have cash flow problems include an over-investment in capacity or allowing customers far too much credit. Manufacturers with clients in seasonal businesses may also suffer a loss of income due to a fall in demand for their products.

Manufacturers who grow their business do so because they have learned when to say no. Rather than getting enticed by a big contract, they first evaluate whether they have the people, machines, and raw materials necessary to fulfill the large order. They also make sure that they understand how quickly their clients can pay them.

Straddling the Paradox

New business owners are often puzzled by a simple paradox—how they can have a profitable business while being short of the cash they need to run it. Since borrowing with its high-interest payments is only a short-term solution, the best way to cope with negative cash flow problems is to figure out if the business can manage its outlay to satisfy the deal before it receives payment.

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