Preventing business failure
Failing to manage cash and cash flow can cause business failure. Even if a business has many customers, it can still have negative cash flowWhen a business has more money going out (outgoings) than money coming in. In this situation, the business can not continue to pay its bills without borrowing money or raising additional capital..
There are two instances when a business can suffer cash flow problems:
- at start-upA new business, usually only with a small number of employees., when large amounts of money need to be invested to get the business started, for example to pay for equipment, initial stock, rent, insurance, hiring, training and staff costs
- during rapid growth, when the business needs to grow quickly but cannot keep up with the cash being paid out, for example, if the business needs to find larger premises and invest in making them ready to move into
If a business has customers who are not paying what they owe, this means that the business may be unable to pay its own bills and may become insolvencyWhen a business runs out of cash and can no longer pay its bills..
Businesses need positive cash flowPositive cash flow is when more money comes in to the business than goes out. to reduce the risk of failure and insolvency. Three possible steps to get out of negative cash flow are:
- negotiate an overdraftAn agreement with the bank to overspend on an account. facility
- keep costs under control
- keep cash coming into the business by arranging sensible credit arrangements with suppliers and customers, and having fewer customers who pay for products and services on creditThe amount of money that a financial institution or supplier will allow a business to use, which it must pay back in the future at an agreed time.