Overtrading
Lengthy credit period and poor credit collection
Poor pricing strategy
Seasonal demand
High expenses
Low sales
Overstocking
Some products, such as ice cream, thrive in the summer, and sales are therefore likely to plummet in winter, resulting in low cash inflows.
This occurs when the business tries to expand too rapidly and engages in more business than can be supported by the funds available in the business. This means that the business will constantly have a cash shortfall, especially if its sales are low.
A company may want to attract customers by offering generous credit terms. However, this may be to the detriment of its net cash flow position, as in the example above. The company must also be vigilant in its credit collection efforts – a low creditor days ratio would be helpful.
The company could hold too much stock and tie up most of its money in it. This again results in inadequate cash in the business.
It could simply be that the sales are low and the company is simply not raking in enough cash. This could be due to being a newly established business, or poor promotion.
If this occurs then the business cash outflow is much higher than its inflows, resulting in a negative net cash flow figure.
In a bid to penetrate the market or drive sales, the company's price may be too low, resulting in inadequate cash inflows.
