Knowing in advance that cash flow problems can happen and knowing what to do when they do happen can prevent most cash flow problems. However, if cash flow problems occur, it is vital to have adequate cash to pay bills while looking for ways to improve cash flow. Read on and learn about top cash flow problems of businesses and how to solve each.
Delayed or non-payment of invoices is perhaps the most common cash flow problem. A customer may delay payment for several reasons, including hoping for a price reduction or because the invoice is lost in the customer's accounting department. In some cases, the customer may be experiencing cash flow problems of their own and may be unable to pay.
Giving discounts and other incentives to secure payment can backfire, causing the customer to delay paying even longer. Fortunately, there are several ways to solve this cash flow problem:
Establish a credit limit and monitor accounts receivable often.
Ask the customer to sign an Acknowledgement of Order form to show that an order has been placed. The document also confirms payment terms and provides a due date.
Charge a credit card on file when a purchase order has been placed.
Prepare a credit application and require a credit check before accepting new customers.
Sell the invoice to an outside collection agency for a fee.
Credit Card Chargeback
A chargeback is the reversal of a credit card transaction. A customer may file a chargeback for several reasons, including not receiving goods ordered, damaged or defective goods, or goods that do not match an invoice.
Chargebacks are expensive for businesses because the business is charged a "chargeback fee" by the credit card company. The credit card company does not care which party is in the right as long as the dispute is resolved.
The best way to prevent chargebacks is to prevent problems. The easiest way to do this is by carefully monitoring product quality and customer service. Providing high-quality products and excellent customer service will encourage customers to accept goods delivery and settle all disputes with the business.
Bad debt occurs when a customer is unable or unwilling to pay an invoice. Bad debt can be caused by the inability to pay, the business's bankruptcy, or the business owner's death.
One of the most effective ways to avoid bad debt is eliminating customers who do not pay promptly. If a customer has a history of paying late or not at all, you should terminate the relationship. If you decide to keep a customer who is having trouble paying, request that they prepay their bill. While this requires more cash upfront, it can prevent a cash flow problem in the future.
When a customer cannot pay the full amount owed, you may elect to offer a payment plan. However, you will need to be careful because a payment plan that stretches over long periods can turn into an unsecured loan.
Inventory liquidation occurs when a surplus or excess inventory must be sold to generate cash. This is a cash flow problem for businesses that sell high volume products.
When businesses sell inventory, they usually sell at a discount to help clear out their list. This price reduction may be a loss leader, meaning that it is intentional and used strategically to draw customers in.
You can avoid inventory liquidation by keeping your business's inventory appropriately. However, you will need to sell the stock quickly and at a reduced price when it does occur. It is important to be aware of the most common signs of inventory liquidation:
An unusually large number of sales
Increased use of credit
A high volume of returned merchandise
A seasonal downturn is a common cash flow problem for businesses that rely on seasonal sales to stay afloat. It can be avoided by expanding a business's market. You can opt to offer a product or service that customers will always need, such as lodging, food, or clothing.
It is essential to be aware of the signs that a seasonal downturn is occurring and to take action to avoid or mitigate the problem. The symptoms of a seasonal downturn include:
An unusually low number of customers
Low employee morale
Cash flow problems can be devastating to a small business. However, many issues can be avoided through careful planning and the execution of sound business strategies.
Don't let a cash flow problem destroy your business. Get ahead of the issue and learn how to avoid, prevent and solve common cash flow problems.
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