Common Cash Flow Problems and Solutions

By Marco Terry
May 27, 2015
COMMERCIAL, RETAIL, FABRICATION : MANAGEMENT

For companies in the glass industry, occasional cash flow problems are simply part of operating in a very competitive environment. This article illustrates five common problems and provides options for fixing them.

Problem 1: Too much inventory

Excess inventory is a problem that can affect glass wholesalers. While it may not be very noticeable at first, ultimately you end up with too much inventory sitting unsold in your warehouse for a long time. This unsold inventory ties up your cash and could leave you unable to pay other expenses.

Solution: Sporadic inventory problems happen to everyone. It’s impossible to plan things perfectly. However, if you have excess inventory regularly, you must solve this problem.

Fine-tune your inventory tracking and management system so that you have the minimum amount of inventory in your stock. Obviously, this amount varies by season, market conditions, contractual agreements, suppliers’ capabilities, and your growth forecasts. Monitor your inventory levels carefully to ensure that key items are never out of stock. Otherwise, you could lose clients.

Additionally, if you own a mid-sized or larger company, consider inventory financing. This alternative form of funding allows you to leverage your existing inventory. However, inventory financing is expensive and should be used only after other options have been exhausted.

Problem 2: Invoices pay slowly

One of the most common problems in the glass industry is slow payments. Most commercial clients, such as construction companies and general contractors, often pay invoices in 30 to 60 days. Sometimes they even take longer to pay.

Slow payments lead to cash flow problems that, if not handled early, may leave you unable to pay important business expenses.

Solution: There are two ways to handle this problem. First, consider offering customers an incentive to pay early. Clients often agree to pay within ten days if you give them a 2 percent discount. Although this simple trick can improve your cash flow quickly, it also affects your profitability.

An alternative is to use financing to bridge the cash flow gap. A line of credit or invoice factoring facility can improve your cash flow while you wait for customers to pay.

Problem 3: Overhead costs are high

Overhead costs are expenses that are not tied directly to selling a specific product or service. Sometimes overhead expenses get out of hand relative to your revenues. These persistent problems can affect your cash flow and, ultimately, your ability to operate the business.

Solution: The solution is simple but not easy. Examine your expenses carefully and eliminate unnecessary things. Negotiate lower prices for the things that you do need, or look for cheaper alternatives. Audit your expenses regularly to prevent this problem from happening.

Problem 4: Too much bad debt

Bad debt occurs when you provide a product or service for which a client does not pay. Some bad debt is normal. An unusually high level of bad debt will affect your cash flow and your profits.

Solution: Review the commercial credit of your customers before making a sale. Provide 30-day terms only to customers who have good credit. Other clients should pay on receipt or in advance. Additionally, implement a good follow-up and collections system to ensure all invoices are paid promptly.

For more information, read the Glass Magazine articles Evaluating Credit and How to Minimize Collections Problems and Get Paid on Time.

Problem 5: Gross margins are low

In a highly competitive industry, competitors are often trying to undercut you, forcing you to lower your prices. Unless you are careful, you could cut your prices to the point that your gross margins are too low. Or worse, you could start selling at a loss.

Solution: This problem is more common than one would think and happens because few owners know the “all-inclusive” cost of their services. This cost factors all costs.

Examine your business and do the following:

  • If you can, raise the price of products that have weak margins.
  • If you can’t raise the price, consider dropping the product.
  • Ensure all proposals price your products and services based on all-inclusive cost.

It is best to start addressing these problems as soon as they surface.

If your company has cash flow problems consider working with a CPA or business adviser who has experience in cash flow problems and turnaround situations.

The author is managing director of Commercial Capital LLC, a factoring company and leading provider of working capital to companies in the glass industry. Contact him at 877/300-3258.