Getting Out of the Cashflow Trap for good cash flow problems may occur at any point of time in business, owing to an interruption in the liquidity of money transferred in and out of business. Thus, if the cash flow for ‘accounts receivable’ is less than that of ‘accounts payable’, the business has a risk of running into a cash flow trap. It needs to be addressed at an initial stage for a ‘smooth business functioning’ and maintaining a ‘positive cash flow’ condition.
The commonly-faced challenges for cash flow in business are:
A late receipt or slow invoice payments by clients hamper the management of cash flow. Also, in case of small business, timely and early receipt of invoices from the clients is essential to maintain stable cash flow.
Remedy: The sooner the receipt, for invoice generated, the better! So, to achieve early or timely receipts; discount can be offered as a rewarding factor to the clients; based on how many days prior to the tentative date the payment is made. This, in turn, will encourage clients to make payments at the earliest possible which will improve cash flow; and help in escape from ‘cash flow trap’ due to late receipt.
Care must be taken before providing a service or a product to clients, who tend to not pay for the same, leading to cash flow trap due to bad debt.
Remedy: Keep a track of the customer’s credit and payment records; thereby, averting sales to customers with credit and payment risk.
Advice from a specialist, such as a financial expert or CPA, can be a useful tool to identify and provide a remedy for cash flow trap.
Short-term financing should be kept separate from that of long-term for proper balance in the cash flow, as there will be no shortage in financing for day-to-day operations. At the same time, a sufficient amount can be generated for long-term financial goals like the purchase of assets or for project work.