Warning Signs of Cash Crunch

Are you some one who is totally unaware that you are about get into a cash crunch in your business?

Are you someone who feels that your business is running absolutely fine even if you are facing delays in your payments?

If you relate to what I am saying then it is right time for you to understand that as an entrepreneur we are not at all able to see signs of danger coming towards us regarding the cash shortage. Today I am going to make you aware that if you face of any of these signs of activities in your organization then it is a sign that you will be soon face the cash crunch and you have to take immediate actions before you fall into the pitfall.

Hey I am Coach Gayathri – Your Financial Crisis Coach.

Today I am presenting this Episode - 5 in the series of various tips on financial discipline

Warning signs of upcoming Cash Crunch in your business?

Many business owners start with a great idea, and they put their capital into establishing and growing their business. At the start, everything seems to go well, with new customers flowing through the doors and demand rising. As business continues to grow, more money needs to be invested for continued growth. More customers mean more inventory, more staff, more training… more of many things.

With this growth, business managers are then forced to choose between storing cash for a rainy day and investing for growth. It is often a gamble, and the worst outcome is when a business invests and then – for some unforeseen reason – business weakens and money dries up.

The business is now struggling to find enough funds to pay their rent, payroll, suppliers and all the other things that a business requires to stay operational. A sudden cash flow crisis kills the business even before it gets established.

Cash flow crisis does not happen overnight and therefore we as entrepreneurs should be on a look out for some the signs, which will definitely lead to the cash crunch if we don’t take any corrective actions to resolve them.

1.   Waiting for the big payments

When our business has been supplying to big corporates and we are dependent on the payments being released from them to meet your operating expenses then it would be difficult to keep your working capital rolling, The Easy solution for this problem is to always try to have variety of customers in your platter and also have different credit periods given to them.

2.   Too many delayed receivables

Most of the business works on impulsive actions and instinct than practical planning. If you have customers who do not pay for your goods and services on their stipulated time then there would be a time where you will have a huge outstanding receivables in the books but no money in hand. 81% of the SME face finance related issues so they are always experiencing delayed payments from their customers.

3.   Late payment charges and losing on discounts

When your customers aren’t paying you on time, it can be difficult to meet your own obligations as quickly as you might like. If you find yourself paying your own bills slowly, you may be on the edge of a cash flow crisis. You may also be paying extra to your vendors on account of late payment charges or loose the discount, which can be availed for early payments.

4.   Misuse of Short term Debt

Small loans and short term line of credit is of a big help in establishing business. In fact, it’s almost impossible to start a business today without the help of both short and long-term lenders. One danger lies in not having a large enough credit line to get you over a cash flow crisis hump. Another is not knowing where and how to access short term loans, or how to use them. 

5.   Market and Seasonal Fluctuations

You start your business based on a great idea. The goods or services you provide are in high demand, and it was easy to jump in with both feet to ramp up production and meet expected demand. Then the market starts to fluctuate, and you find yourself with too much inventory as sales begin to slow down. The problem, of course, is that your on-hand working capital are now tied up in inventory instead of protecting you from what is probably just a temporary downturn. You could find yourself in a cash flow crisis that threatens to shut your doors before the market has a chance to rebound.

A cash flow crisis can be devastating to a new business without established cash reserves or corrective actions taken to solve the cash crunch. New businesses fail every day because owners get taken by surprise and have no proper plan to see them through. Understanding the warning signs of a potential working capital crisis can give you the opportunity to make the moves necessary to keep your doors open today and provide the opportunity to succeed tomorrow.