Allowing too much credit
A great deal of business is done on credit. One of the dangers of this is that firms allow their customers too long for payment. This means that a firm may be waiting for payment and may be forced to borrow for this period. Failure to control debtors may lead to bad debts.
Taking too much credit
Taking more credit may appear to help a firm’s cash position as cash payments are delayed. However some drawbacks include higher prices, lost discounts and creating a bad name in the trade.
Over borrowing
Businesses may borrow to finance growth. As more loans are taken out interest costs rise. Over borrowing can threaten a firm’s cash position and control of the business. It is important to fund growth in a balanced way, by raising some capital from share issue.
Underestimating inflation
Businesses often fail to take into account inflation. Inflation raises the costs which can cause shortages. This is often the case if higher costs such as wages or raw materials cannot be passed on in terms of a higher price.
Unforeseen expenditure
Businesses are subject to unpredictable external forces. They must make a financial provision for unforeseen expenditure (e.g. equipment breakdown, strikes, bad debts etc)
Unexpected changes in demand
There are times when demand for a product unexpectedly falls. Fashion changes could lead to a fall in demand which in turn leads to a lack of cash flowing into the business
Seasonal factors
Sometimes trade fluctuates for seasonal reasons. In farming cereal farmers have a large inflow when their harvest is sold, for most of the year they have to pay expenses without any cash flowing in. This situation requires careful management indeed, although it is possible to predict these changes.
Sources of cash flow problems
