How to Define Business Financial Difficulties
Money is the fuel that keeps a business running, so a lack of money can cause a company's activities to stall or force it to pay extra to borrow funds to keep itself afloat. Business financial difficulties primarily come from two sources: either you are spending too much to operate your business or you are not taking in enough money to cover your costs. These two type of difficulties are closely related: the money going in to your business should more than cover the amount going out if you are to make a sustainable profit.
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Instructions
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Review the amount of money that your business owns, and the amount that it owes. Use a balance sheet to list your assets and liabilities. Evaluate the assets on your balance sheet to determine which of them represent resources that are immediately available for the purpose of meeting present business obligations. Cash in your bank account is a flexible resource because you can use it to pay bills, buy inventory and pay your employees. Equipment that you own may be valuable to you for your day-to-day operations or when you decide to sell your business, but it won't help you to resolve day-to-day cash-flow issues, and most banks won't let you borrow against it as collateral.
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Prepare a cash-flow statement to evaluate and define your company's financial difficulties. Dedicate a column for each month of the upcoming year. Use the upper portion of the page to list each type of expense that your business incurs, such as payroll, materials, rent and interest expense. Use the bottom portion of the sheet to list each type of capital that your business has available, such as income from sales and money from loans and investments. Tally your expenses as well as your income, and subtract your expenses from your income month by month. Use this format to determine whether your business will have sufficient funds to meet its financial obligations.
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Determine whether your company's financial difficulties stem from inadequate cash flow or inadequate profit. You may have sufficient cash flow without making a profit, or you may be making a profit but still encounter cash flow difficulties if too much of your income is going to pay off past debt. If you have cash flow without profit on a long-term basis, your business will eventually be unable to meet its debt obligations. If you have profit without cash flow on a long term basis, you will eventually climb out of your financial hole, provided you are tenacious and flexible.
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References
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