8 Reasons Why Businesses Run Out of Cash

DID YOU KNOW? Cash is to a business what blood is to a living thing? Without the right type and amount of cash, your business becomes anemic; susceptible to all manner of diseases and shocks. In most cases, what kills a business is really not making loses but lack of cash. Your business could be making huge profits but if you won’t have cash to meet your immediate obligations then you are endangered species. Now. Let’s address how businesses run out of cash.

1. Failure to Manage Debtors
As a business, you will find yourself having to sell on credit. The problem is sometimes out of desperation or ignorance, we end up taking up really big orders from customers who are slow payers. Sometimes you even struggle to fulfill the order through small expensive loans, then the delay forces you to take on even more expensive loans to stay afloat as you wait on the customer to pay. Other times you just delay to send invoices for work done either due to sheer laziness or lost notes on the work done, deliveries or pending bills. You choose not to chase the payments, either because you supplied a friend whom you don’t want to nag, or you think playing nice will yield other businesses in the future. A good business ensures it collects every single coin out there at the earliest possible time. When things go too bad, seek legal redress on defaulter including engaging debt collectors and auctioneers. It is possible to recoup the costs of collection including the opportunity cost of the money in the time it has been out there.

2. Failure to Buy in Credit
Some people are in the habit of paying as quickly as possible. These are the kind that think it marks them out special for not having any debts/credit. They feel embarrassed to even have loans and will rush to pay off the first instance they can. Well, just as you must sell in credit, you must never miss any opportunity to buy in credit. It is important to open credit lines with suppliers where you have the possibility to get supplies on credit and pay on later dates. Build a good relationship with your suppliers.

3. Failure to cultivate a good banking relationship
Have you cultivated a good relationship with your bank? Unlike what most would think, it helps even more to know the staff than the managers. There are banks out there that are strong on SME banking and relationship banking. It’s important you ensure you have the best possible deal. At times, you will need some flexibility to fit in to the loan products on offer, others you will need some restructuring and rescheduling on your loans when times are not good. Your bank should be able to open you a credit line where you can access some overdrafts. Sometimes the cheques you issue your suppliers will catch you flat footed. Others you will get good deals when the money isn’t in the account. At times you will need the best possible forex rates. Others you will need bid bonds, performance bonds and even letters of recommendations. Sometimes you will need to be introduced fellow customers of the bank. Or it might just be a case of you run 10 minutes late from the bank’s closing time. If your bank doesn’t cover you in all these and others then you are playing yourself.

4. Losing Cash on Poor Purchasing
While it is good to buy in discount, sometimes entrepreneurs end up buying large quantities than they need to enjoy quantity discounts or rush to pay cash to enjoy cash discounts. This is always a trap. Don’t go for it, unless it is absolutely necessary. Chasing cash discounts might get you into situations you need to borrow at higher interest. Quantity discounts often come with the double burden of committing too much money in particular slow moving items and lacking money to service what is in demand and could make money. It also brings in the burden on space and crowding out vital stock, you fill up your store or even have to incur expenses leasing more space.

5. Purchasing Machines & Equipment in Cash
Purchasing a machine in cash will strain your cash flow and ability to meet immediate needs. Always explore the options available. Where you must own the machine and equipment get loans and do that. You will pay lesser amounts in installments and leave the rest of the money to continue working. Some of the machines you may only need sparingly so you’d rather lease as and when need arises. There are plenty of deals for that in the market. Sample them.

6. Failure to Manage Staff Cost
Are you the kind of entrepreneurs who employ relatives and friends? How would you handle them when you realize they are lazy or incompetent and are losing out on productivity? What would you do if business slowed down and you needed to rationalize some employees? Some entrepreneurs are stuck with employees who don’t earn their keep. They are there despite low productivity and even being surplus to requirements. Some are paid astronomical salaries for jobs and competencies that can be cheap in the market. Keep your employees on performance, engage only those you need. An entrepreneur is like a farmer who will always have to walk around the orchard pruning surplus leaves and branches. Otherwise you end up with huge trees that won’t yield much.

7. Being exposed to theft
What is your policy for handling cash in the business? Some entrepreneurs are so much exposed to theft they leak money like a stream. If you let your employees hold too much money it is always an invitation for them to steal it or lose it. It is also an invitation to thieves, and, am sure you have heard of the stories of businesses that have lost good coin to thieves. How about fraud by your staff, stealing your stock, selling their stock in your business, stealing your customers etc?

8. Stealing from the business?
Are your feet on the ground? Just because your business is on a green patch right now is no free license to engage in ostentation. Some entrepreneurs will rush to procure space in the prestigious premises, you look at their reception desks and they are quite impressive all screaming money. Don’t pay a coin more than you have to. Sometimes it doesn’t take staff or thieves stealing from you. Sometimes you do it yourself. If you don’t respect business cash then you will be tempted to misuse it. Diverting money from business to cover personal expenses like buying big cars, moving to posh living addresses, moving your kids to those schools you pay in two commas and all. Other diversion will be you sinking money in that big piece of land, or a house or just another business when the business isn’t ready for it (we should revisit this issue of theft and fraud soon)
It is the business of every entrepreneur to ensure their business remains alive. This you do by having a solid cash flow plan. NEXT let us talk Cash Flow Planning?

Just a small favour; would you please share this article in your social sites after reading. It is good for your friends too. You never know how it will affect their lives. Thank you

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