Consistent cash flow is one of the most important aspects of building a successful business, it is the lifeblood of every company that needs a steady source of income and cash on hand for the day-to-day running of a business.
Therefore, when there is inconsistent cash flow, the business tends to crumble, leading to total failure of the business if it is not handled properly. There is no denying that consistent cash flow is important, so plans for your cash flow should not be an afterthought.
Inconsistent cash flow occurs when a business does not have a steady source of income or enough cash to pay its liabilities. When this happens, the cash balance of the business is no longer enough, therefore, the business struggles to pay its debts.
Unfortunately, many business owners struggle with cash flow problems, nevertheless, it is important to know the causes of inconsistent cash flow, that way you can handle it properly to avoid further occurrence.
Some of the causes of inconsistent cash flow include:
Not Paying Attention to Expenses
Every business makes expenses, however, if you do not keep track of the expenses you make as a business owner, chances are that you might run into debt and run out of cash.
Many businesses end up in a cash flow crisis due to unexpected expenses or too much money going out each month without proper monitoring or tracking.
As a business owner, you must take a renewed, vigorous look at the money leaving your business.
Poor Financial Planning
Every business without a strong financial plan is bound to fail because a lack of a disciplined approach to financial planning is an ongoing cause of inconsistent cash flow.
When a business does not operate with an accurate and detailed financial forecast, financial plan, and budget, it means it cannot foresee any potential cash flow shortages and take action to avoid them.
Not Creating a Cash Flow Budget or Forecast
Every business works and operates with a cash flow budget or forecast. It is the estimate of cash you are to receive and the amount of cash you are to pay during a certain period. The cash flow budget helps to project and oversee the amount of money coming and leaving your business, therefore, without a working cash flow budget, your business is at risk of running out of cash.
Declining Sales or Low-Profit Margins
This is one of the major causes of inconsistent cash flow in a business. Declining sales means a reduction in sales caused by either an increase in competition from major competitors, a general decline in sales across your industry, or poor economic conditions.
On the other hand, your profit margin is an important metric in analyzing your business because it tells you how much money your company makes from the money it earns.
A low-profit margin indicates that either your costs are too high, your price is too low, or both, hence, as a business owner, you need to consistently review and track your profit margins to know whether something needs to change to help improve your business cash flow.
Therefore, even if your sales are not declining, as long as your profit margins are getting smaller, your profitability will be negatively affected.
Most businesses experience seasonal highs and lows, where the high or peak periods are great for sales compared to the low or declining periods.
That means if your business is going through a seasonal sales decline or lull or you are dealing with several debtors who are not meeting your payment terms, your finances are likely to be under pressure and chances are that you might run out of cash soon.
Understand your business’s seasonal cycle and know the strategies to apply to ensure you don’t run out of cash even during a declining season.Featured Image Source: HW Accounting Services
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