10 Control Errors That Can Ruin The Cash Flow Of Your Business

Weaknesses To Avoid In Managing The Cash Flow Of Your Business

Cash is the lifeblood of your business. The business needs cash to meet due obligations, replenish stock, acquire tools and assets for operation, pay wages and meet other operational requirements. Without cash, a business will be unable to make payments that are required to run its activities and this may signal a descent into financial crises and possible business failure.

Cash is part of the working capital, the stream of resources constantly changing form to keep the business in healthy operation. You use cash to buy stock. Stock gets sold and may immediately turn into cash or be held as receivables if customers are yet to pay. Eventually customers pay and the receivables turn into cash. If this stream continues to flow smoothly, your business will not only generate good turnover, but also will remain reasonably liquid.

A lot could however go wrong. If your cash flow is not well managed, the business may get cash-strapped, an unhealthy condition that might cripple operations and kill the business. A number of factors can lead to this:

Your system many not be billing promptly for goods delivered or services rendered, if cash is not taken up-front. If customers don't receive invoices, they are unlikely to pay and the cash inflow from sales will not be forthcoming.

Customers are allowed unreasonably long credit period. If the credit period you grant is too long, you won't receive payments that should keep the business in funds. If there is a mismatch and you don't receive similar credit from your suppliers, you will unduly fund your customers to the detriment of your business.

Billed customers may fail to pay. If there is no effective machinery for monitoring and collecting due receivables, the business will be denied the cash inflow that should nourish it.
Cash is not properly accounted for. If the system is weak, losses may occur. For example, sales revenue may be diverted, purchase prices may be loaded, leading to overpayment or sales receivables are fraudulently written off. All these will lead to loss of needed funds, robbing the business of its liquidity.

If stock is not sold off in reasonable time, perhaps due to over-stocking, or goods are allowed to deteriorate and can't be sold, there is a clear impact on cash flow as the cash invested in the stock is tied down or lost. Unplanned stocking, purchasing out of specification or poor attention to quality may all spell doom for the business.

Uncontrolled overhead expenditure, especially if unmatched by the earnings capacity and cash flow pattern of the business, may induce illiquidity. Unjustified investment in capital assets will also sterilize operational funds and deny the business the liquidity to run effectively.

Unplanned growth/expansion can also create cash flow management problems. If, in an attempt to grow rapidly, extensive investments are made which may not immediately generate any or commensurate earnings, the business may run short of working capital. The consequence could still be damaging if not properly addressed. Related to this is over-trading, where the business dabbles into too many activities or attempts to operate beyond the scope of its resources. When not well-contained, this could signal the demise of the business as it quickly runs into a funding crises.

Unbridled borrowing may also jeopardize the business' cash flow stream. If borrowing is not well-targeted and carefully structured to align repayments with the business' cash flow pattern, the likely outcome will be that due repayments will not meet the resources to retire them. If this degenerates, foreclosure may follow ultimately.

In similar vein, cash flow nightmares can arise from poor management of trade obligations. If obligations to supply channels, contractors, consultants, staff, tax authorities, shareholders, etc are not properly anticipated, planned for and built into a cash flow grid, funds may be misallocated without providing for impending obligations. This could induce serious financial crises.

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Finally, the business may generate good cash flow, but due to poor vision and weak cash management, cash is allowed to accumulate and lie idle either in your vault or at the bank. If no funds are borrowed for the business, there is still a cost and the business loses heavily by not prudently investing its balances.

The point made is that while a company may seemingly be in good business, serious errors of cash flow management can throw a spanner in its works and suddenly induce distress. Sometimes it is possible to successfully refinance and restructure operations. At other times, this may happen and the business may fail.

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