Let’s talk about Cash Flow problems. To start, what is Cash Flow? Cash Flow is the physical money coming in and out of your business. Buying something on credit does not get recorded because no money has yet been exchanged, but you paying off the credit does because money is physically leaving.
Positive cash flow indicates that you are bringing in more money than you are taking out/spending. Negative cash flow means your expenses are outweighing your income. Because cash flow does not account for credit, it is possible to have a profitable business with a negative cash flow, especially when using accrual accounting.
Cash flow is categorized in 3 ways. Operations, Investment, and Financing.
Operations includes everything related to the products and services your business offers. Investment involves the buying and selling of long terms assets such as equipment and buildings. Financing includes loan repayments and dividends.
So now that we know what Cash Flow is, what are some of the problems you can run into?
Cash flow problems arise when a company does not have enough money to cover its debts as they become due. While this is normal to happen on occasion, a cash flow that is consistently negative is a red flag and should immediately alarm management to take action.
Again, a negative cash flow means more money is leaving then is coming in. This can be caused by:
- Low profits
- Over-investment (too much owed)
- High overhead
- Unexpected expenses
- Product priced too low
- Customers who are late on payments/no collections plan
- Not paying attention to the finances
So the top two things to look at when faced with a negative cash flow are where to cut expenses and increase earnings. You want to increase the cash coming in by getting more customers, raising prices, and ensuring customers pay on time, OR decrease cash going out by borrowing less money and at lower interest rates, using a just-in-time inventory system, and reducing overhead.
Many of these things are easier said than done. This is why a good financial advisor is key to helping your business grow and stay cash flow positive. Once you’ve identified your cash flow problems, you and your advisor can work together to turn the tide.
Assemblage LLC is ready to sail and get that wind blowing in your favor.
Contact us at assemblagellc.com to improve your cash flow efficiently.
Contact us today, and tell us how we can be an asset to you!