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What does Poor Cash Flow Indicate About your Business and Its Reasons

Cash flow reflects the current state of your business. Positive cash flow indicates good business health and vice versa. It may also be indicative of how you have been managing your business, the general state of the economy, the demand and supply situation for your products or services and how well you have been managing your cash flow. While a negative cash flow is bad for your business, it is worse if you fail to identify the reasons and have concrete data as findings. Good accounting software allows you to track your cash flow and identify reasons or heads where cash flow has been drying up.

Reasons the cash flow can be bad

Factors can both within and beyond your control. We are discussing all factors here.

Supply and Demand Situation

The economy in general can be in a bad shape and it is going to take a while before it recovers. In such a situation, circulation of money is weak in the system and business tends to suffer because of poor cash inflow. Since you have lesser cash flow, you are not inclined to invest more in production and that contributes to the poor money circulation. It may also be that the supply situation with your products or services are not good because they are seasonal in nature or just out of fashion may be.

Poor Customer Relationship Management

Unhappy customers can be a major source of poor cash flow. If the after sales have been bad and the customer has been unhappy with unresolved problems, then the customer might even refuse to honour payments. The problems can be aggravated especially if the payments are recurring invoices or receipts, then poor cash flow is a possibility.

Terms and Conditions of Transactions

The terms and conditions that govern the transactions can be a source of bad cash flow. If the credit limit is not proportionate with the credit history of the customer, then possibilities are that the customer might not honour payments, especially with an extended credit limit. The longer the credit limit granted to the customer, the greater can be the possibility of poor cash flow.

Poor Management of Cash Flow

This is important because you need to track the heads or nominal codes that have been the sources of poor cash flow. You need to set up appropriate nominal groups or nominal codes in a good cloud-based accounting software and record transactions on that. Additionally, your software needs to be able to record the outstanding balances of each customer over a period of time. For example, if there are predefined periods of 30, 45, 60, 90 days and so on over which you can track outstanding balances, you can have a policy of recovering the outstanding balances.