Unexpected Cash Flow Issues

A company may experience unexpected cash flow issues, and even though unexpected it’s not unusual. How can that be?

We Walk into Contradictions

You wouldn’t think if something was not unusual that it would be unexpected. But, when it comes to cash flow issues it’s often unfortunately true that they’re both unexpected nor unusual. Why is that? It would seem that if this is not unusual then it shouldn’t be unexpected, right? Yet, because of how so many businesses are operated it is easy to walk right into what seems like a contradiction; i.e. both unexpected and not unusual. In essence many business owners are caught by surprise when cash gets tight.

Flawed Thinking

It’s easy for business owners and managers to get tunnel vision and get so focused on something like sales that they miss the reality that unless those sales can be collected in a timely manner then at some point unexpected cash flow issues are likely to arise. That’s why it is so important to have clear credit policies that are followed and to stay on top of collections. Remember, a sale that cannot be collected is worse that no sale as you not only failed to collect the cash for the sale but you also are out the cost of the product and/or labor used to fulfill the sale. For a little more on the importancet of collecting accounts receivable in a timely manner and some suggestion on how to do this see 3 Low Cost Sources of Cash – Part 2 and 80/20 Rule for Receivables Management.

Another way a business can demonstrate flawed thinking is in the mistaken belief that they must be fully stocked in every inventory item at all times. Unfortunately that kind of thinking can rapidly create situations where excessive inventory levels keep cash tied-up for extended periods of time. Many business would be better off offering some products for which they only carry a minimal quantity or even carry none and let the product be a special order or something that they dropship from their supplier. For more thoughts on inventory and the risk of excessive quantities see 3 Low Cost Sources of Cash – Part 1 and Small Inventory – Big Benefits.

Of course, accounts receivable and inventory are just two of the areas that can cause cash flow issues. Others include unnecessary purchases of equipment, over-staffing, poor expense controls and failure to use a budget to guide spending. You can see more on adhering to a budget here Why You Never Hit Budget.

What about Your Company?

Are you closely monitoring the activity in your company by having a budget and actually using it to control spending? Are you on top of collections and diligently managing inventory levels? Are your staffing levels appropriate? Are equipment purchases and other expenditures carefully justified? Do you use such things a comparison shopping or considering an alternative?

Remember, unexpected cash flow issues really aren’t unusual, so be diligent so the unexpected doesn’t happen to your company.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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