1. What is a cash flow problem?

2. What is a cash flow problem?
Just to say ‘when there is not enough money’ is too simplistic.
Firstly, most of us could use more money most of the time! Secondly, it does not recognise the different degrees of ‘problems’ that can result from inadequate cash flow.

3. Example 1 – ABC Ltd
ABC Ltd realises that its cash flow forecast was too optimistic.
It assumed that debtors would pay after one month. In fact, they are taking two months to pay, on average.
This is a problem as the firm has to increase its bank overdraft and this bears a high rate of interest.

4. Example 2 – XYZ Ltd
XYZ Ltd has reached its overdraft limit. It believes it can just survive until it receives cash from the sale of surplus land.

5. Example 2 – XYZ Ltd
Before this deal can be completed, a supplier suddenly insists on cash payments for all further deliveries. This cannot be afforded.
Production stops, customers are disappointed and the cash inflows dry up.
The firm is forced into insolvency by creditors who want all assets sold to be able to get back some of the money owed to them.

6. XYZ Ltd
This is a long-term and lethal cash flow problem
ABC Ltd
Expensive, yes, but its cash flow problems do not threaten the survival of the business
Better debt management could resolve the issue within several weeks
It is a short-term cash flow problem

7. So what is a cash flow problem?
A business has a cash flow problem when it is unable to pay its current liabilities (generally creditors) as they fall due.
A business is forced to take action that has negative short- or long-term effects because cah inflows are insufficient