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Jennifer Pontinen

Jennifer Pontinen

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Ten Reasons Companies Have Cash Flow Issues

  1. High Levels of Inventory - Compare your business with industry averages and calculate your ideal Inventory level based on those averages.  Is your business in line?
  2. High Levels of Accounts Receivable - Review your customer credit policy.  Do you regularly send out invoices and statements?  How long will you let a customer go before you call them and ask for payment?  What is your collection process?
  3. High Levels of Accounts Payable - If you are purchasing too much inventory or have high levels of expenses then your monthly obligations to your vendors may be using up cash.  Double-check to make sure your purchasing plans and expense levels are manageable.
  4. High Levels of Short-Term Debt - Have you financed long-term assets, such as equipment, with short-term debt, such as Credit Cards or Lines of Credit? This mismatched financing can cause higher monthly payments.  Determine if some short-term debt can and should be converted to long-term debt.
  5. High Levels of Total Debt - Are your business assets financed more by debt than company equity?  What changes can be made to lower your debt obligations or make them more manageable?
  6. Low Levels of Retained Earnings - Has the business had low or no profits over the last number of years?  This causes low levels of equity which means the business must rely on debt to finance growth of the business.
  7. High Levels of Sales Growth - Growing sales too fast can use up cash quicker than it generates it!  Inventory, Accounts Receivable, and other Assets must increase in order to accommodate additional sales. This means the business is spending money before it receives the benefit of the additional sales.  The quicker the sales growth, the more money that must be spent up-front to finance it. 
  8. Poor Expense Control - When was the last time you reviewed your fixed expenses to determine if they can be lowered?  Get quotes on insurance, phone service, supplies, etc.
  9. Seasonal Sales - Many companies have large swings in sales or even do most of their business in only a few months.  However, even though sales may not be coming in, expenses still need to be paid.  Planning for these ups and downs is key.
  10. Lack of Financial Projections - Many of these "cash users" can be properly managed if you know they are coming and can plan for them.  Visit your Small Business Development Center to develop Cash Flow Projections for your business.
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