Cashflow troubleshooting
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- Excessive borrowing
- The periods of credit you give and receive
- Too much stock
- Buying long-term assets from cashflow
- Out-of-control overheads
A large long-term loan or a big overdraft can lead to cashflow problems due to the impact of interest changes and large loan repayments.
The periods of credit which you give to customers and which you receive from your suppliers determine whether your business is cashflow positive or cashflow negative.
Example
Allowing your customers 60 days to pay, eg, restaurant booking for special events or functions, while your suppliers give you only 30 days to pay them may lead to your business being cashflow negative for 30 days.
It’s cheaper to buy in bulk but you can end up with too much stock which might spoil before you can use it.
Instead of using scarce cash to buy long-term fixed assets, eg, furniture or equipment, consider taking out a loan or entering into a leasing arrangement.
Spending too much on your overheads puts pressure on your cashflow.
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Don’t bury your head in the sand and pretend that your cashflow problems don’t exist. Be proactive and consider these three short-term actions to solve your immediate problem.
- Prepare a Cashflow Forecast
- Arrange a temporary overdraft increase
- Talk to your bank manager
A flexible and realistic Cashflow Forecast will give you a better understanding of the source of your cashflow problem and a better understanding of how to put it right.
If your forecast indicates an upcoming negative cashflow position, you should accelerate debt collection or identify particular supplier payments for delayed payment.
Remember!
Stay within agreed credit terms and consider also the knock-on effects on subsequent periods.
If you can’t accelerate debt collection or delay upcoming supplier payments, notify your bank manager to arrange a temporary overdraft increase.
If the negative position is likely to be more long-term, arrange a meeting with your bank manager to discuss your bank facilities. You may also need to seek advice from your accountant.
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