Profitability & Cashflow- The Keys to a Successful Business

Avoiding cash flow problems

Not all business failures are due to lack of profitability.

Even profitable businesses go broke when they run out of cash.

Cash flow is the ability to generate a sufficient supply of cash so that a business is able to meet its demand for cash and pay it’s debts as they become due.

The main causes of cash flow problems are:

  • Losses or low profits:

Low profits or losses inevitably bring cash flow problems. Most loss-making businesses eventually run out of cash.

  • Holding too much stock:

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

  • Allowing customers too much credit and for too long:

One of the most common causes of cash flow problems is poor credit control i.e. giving too much credit to customers and giving credit for too long.

  • Overtrading (growing too fast):

This occurs where a business expands too quickly, putting pressure on short-term finance. Expansion without having the required finance in place will result in a cash crisis.

  • Seasonal demand:

Predictable changes in seasonal demand can create cash flow problems if the business has not organised the proper finance for it.

  • Over-investment in capacity

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

Having a proper budget, business and financial plan can ensure your business does not run into cash flow problems.

Contact Sean Donnelly