In order to make sure that business organizations do not experience negative cash flows a business must have strategies in place when there is a liquidity crisis. This could include
· the negotiation of short-term bridge loans
· offering discounts on products or services being sold
· requesting the extension of credit from suppliers or lenders beyond the usual repayment periods
· making adjustments to purchases and all other payments
· selling non-critical assets in order to raise the cash needed
Credit Control - firm does a bad job in deciding when a customer should have trade credit and how much trade credit they get. If not careful enough then the firm will starthaving bad debt (customer doesn't pay). One reason why some this is especially difficult that without the customer receiving trade credit, they may not purchase the goods and the firm loses out on a sale.
Collections - firm doesn't chase up debtors to pay their outstanding debts.
Overtrading - firm tries to grow too quickly.
Overstocking - firm keeps too much stock (inventory). Though stock is a current asset, just sitting on the shelf does not generate any money for the firm. Also, excess stock requires storage which costs money.
Seasonality - certain products have great demand swings depending on the time of year. For example, Christmas trees only happen to be popular right before Christmas. A firm may need to buy a huge amount of trees to have enough to meet the demand of their customers. Do they have enough cash to buy the trees?