Where can you find cash-flow traps? Multiple places.

It’s interesting how some business owners seem to think that cash flow problems are mainly caused by one major factor – low sales. But experienced business owners know that is not always the case. There are several minefields out there that can unexpectedly cause a dilemma within a company and prompt them to start looking for help. This is where a factoring company like ours comes into play. There are many scenarios that can create a situation when there is no money in the till to pay for expenses like payroll, utilities and suppliers. Consider this one – low profits. As the old joke goes, are you buying bricks for $2 and selling them for $1 and hoping to make it up on volume? As we all know, building in enough of a margin to make a profit is a critical exercise for any company. That includes calculating the cost of non-paying customers, averaging payment times for receivables, pricing in adequate marketing, etc. Next, how about buying too much equipment or paying too much for equipment and not getting a return on your investment? Ever buy a widget and then find out you don’t need it? Ouch. Payments for idle or low-producing machines can put a crimp in anybody’s cash flow. How about stock? What’s Wal-Mart really, really good at? Moving their merchandise. Pile up too much merchandise and you could get caught in a cash bind. Also, today’s hot toy might end up in tomorrow’s sale bin. Merchandise can become unpopular real fast. Then you have seasonal stock. Buy too much, buy the wrong items or fail to sell it all and you could be sitting on untapped funds for an entire year. Extending too much credit to your customers? Sure, your customers are nice people and you know they will pay their invoices. Or at least you thought they would. If you are just starting out, this is going to be one harsh lesson you will soon learn in the world of business. Factoring companies see credit policies in action. You might think your customers are going to pay on time, but many times when they are strapped, they are paying the vendors who yell the loudest first. And if they are not paying you, you are not getting your cash in the door. Aggressive expansion plans are another common way to put your company in hot water. Sure, you want to grow, you want market share, you want to beat out your competitors. But you also know that building new locations can take longer than you think. That new location might not be producing the revenue you need to pay for the financing you borrowed to launch that expansion. Factoring companies managers have seen many traps that pull down businesses. Their mission is to pull you out of these potholes and get you back in the black. The smart thing to do is be aware of them before they put you in a bind.