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5 Most Common Cash Flow Challenges Facing Businesses Today

The most successful businesses are not only inherently profitable, but they also benefit from a strong balance sheet, enjoy abundant cash flow and operate under manageable debt levels. Achieving this outcome, however, is no easy feat. At Veritas Accountants, we take the time to learn your business in order to deliver targeted, strategic advice. Here are five common cash flow challenges faced by both growing and established companies. 

  1. Managing Receivables: Receivables include any funds owed to a business by its customer for goods or supplies rendered. In the absence of a robust receivables management system, it’s easy to lose track of money owed to your business, reducing the amount of cash you have on hand at any given time and hindering your ability to pay debts and other liabilities as they fall due. Failing to track receivables efficiently can lead to cash flow management and customer satisfaction issues. To solve this problem, implement strategies to help you keep track of whether your business is collecting payments on time, billing on time, and effectively managing a sheer number of invoices. 
  1. Tracking Payments: On the other hand, it’s equally important to track account payables. Commonly referred to as payables management, the practice entails looking after your company’s debts owed to a third-party such as a supplier or vendor. To ensure a frictionless payment tracking, we recommend opting for a paperless, streamlined process using computer software that’s easy to understand and use across your business and operations.  
  2. Inadequate Cash Reserves: Emergencies happen. And when they do, it’s important to be able to rely on liquidity as opposed to debt. But just how much cash should your company store away for an emergency? There’s no right answer as this depends on your business profile and industry. Contact us for advice, including how you can prepare for a financial emergency. 
  3. Poor Working Capital Ratio: Ultimately, the goal of cash flow management is to optimise working capital, which is the difference between a company’s current assets (cash, accounts receivables, etc.) and current liabilities (short-term debt, accounts payables, etc.). To optimise working capital, strive to achieve a balance between debts owed and debts coming due, as this will determine the amount of money flowing in and out of your company’s bank account. To demonstrate the importance of working capital, consider that a negative working capital ratio implies that a company is failing to meet its debt requirements on time. On the other hand, a very high working capital ratio may not be a great indicator either, as it implies that the company is failing to invest its surplus capital. 
  4. Failing to Monitor Debt: All businesses require a moderate level of debt to grow. Capital, after all, is the lifeblood of western economies. However, failing to monitor debt levels and upcoming payments can strain cash flow beyond repair. Depending on the nature and terms of a loan, missed payments can lead to hefty penalties and/or increased interest payments. In the worst case scenario, a creditor can exercise its right to take possession of any underlying securities that guarantee a secured loan. In any event, it’s crucial to not only monitor debt payments and outstanding balances to ensure that the business can support its payments in the short- and long-term. 

In the midst of a pandemic that has threatened supply chains and upended unique business challenges, many companies find themselves faced with common cash flow challenges discussed in this article. Left unchecked, poor cash flow management can swell into more severe problems that are more costly to solve down the line. Why not take a proactive approach towards securing your company’s cash flow management? If you’re ready to get started, please contact us for a no-obligation consultation at Veritas Accountants today