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Cash flow - causes of cash flow problems

Author: Jim Riley  Last updated: Sunday 23 September, 2012

Finance - Causes of cash flow problems

A cash flow problem arises when a business struggles to pay its debts as they become due.

Note that a cash flow problem is not necessarily the same as experiencing a cash outflow.  A business often experiences a net cash outflow, for example when making a large payment for raw materials, new equipment or where there is a seasonal drop in demand.

However, when cash flow is consistently negative and the business uses up its cash balances, then the problem becomes serious.

The main causes of cash flow problems are:

Factor

Why It Causes a Cash Flow Problem

Low profits or (worse) losses

There is a direct link between low profits or losses and cash flow problems. Remember - most loss-making businesses eventually run out of cash

Over-investment in capacity

This happens when a business spends too much on production capacity. Factory equipment which is not being used does not generate revenues – so is often a waste of cash

Too much stock

Holding too much stock ties up cash and there is an increased risk that stocks become obsolete (i.e. it can’t be sold)

Allowing customers too much credit

Customers who buy on credit are called “trade debtors”
Offering credit to customers is a good way to build revenue, but late payment is a common problem and slow-paying customers put a strain on cash flow

Overtrading

This occurs where a business expands too quickly, putting pressure on short-term finance.  For example, a retail chain might try to open too many stores too quickly before each starts to generate profits

Seasonal demand

Predictable changes in seasonal demand create cash flow problems – but because they are expected, a business should be able to handle them



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Starting a Business

Sources of Finance for a Startup
Franchising
Cash Flow Forecasting for a Startup
Creating & Protecting Business Ideas
Startups and Understanding the Market
Market Research for a Startup
Locating the Startup Business
Choosing a Legal Structure for a Startup
Employing People in a Startup
Generating and Protecting a Business Idea
Using Breakeven in Decision-Making

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Revenues
Breakeven Basics
Costs, Revenues and Profits
Business Costs
Using Budgets
Using Breakeven in Decision-Making
Investment Appraisal Basics
Financial Strategies
Measuring and Improving Profit
Improving Cash Flow
Working Capital
Balance Sheet
Income Statement
Financial Efficiency Ratios
Profitability Ratios and ROCE
Liquidity Ratios
Gearing

Marketing

Competition
Products & Brands
Place (Distribution)
Promotion
Pricing
Price Elasticity of Demand

Business Organisation

Basics of Business Growth
Business Activities
Legal Structure Basics
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Limited Companies
Generating and Protecting a Business Idea
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People

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Economic Environment

Economic Sectors
Government Spending & Taxation
Inflation
Unemployment
Interest Rates & Monetary Policy

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Leadership styles
Business Culture
Change Management







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