Cash flow problems happen when a business does not have enough liquid cash to

cover its liabilities. When cash outflows exceed cash inflows, businesses may
struggle to pay debts and other expenses (Atrill & McLaney, 2019).
Net cash outflows don’t necessarily indicate that a business has a cash flow
problem. It’s common for businesses to experience a net cash outflow when making
large payments or experiencing seasonal business fluctuations. Cash flow only
becomes a problem when outflows exceed inflows. At that point, the business uses
up its cash reserve and can no longer meet its liabilities.
Cash flow issues can arise from low-profit margins, problems invoicing and collecting
payments, and over-investing in inventory or capacity.
By checking with the Watley’s financial statement, although they are making more
sales, the profit they make in 2015 are lesser than in 2014. Selling products that are
too low can result in low-profit margins. Similar problems can arise when sales
teams offer discounts that cut into profit margins. Often, this problem impacts small
businesses that don’t have a well-developed pricing strategy. Reviewing expenses
and pricing can help small business owners determine if they should adjust prices or
discontinue products or services with weak margins (Ud-deen, 2020).
Also, there are more inventory in 2015 than in 2014. Over-investing in inventory can
leave businesses in a pinch if sales don’t cover investment costs. Business owners
should use an inventory management system to balance their inventory. Monitoring
inventory can help them avoid overstocking and running out of key products.
Keeping inventory on hand for the shortest time possible can help keep inventory
from contributing to cash flow shortages.
Watley’s might try to reduce expenses or operating costs, such as:
 Discontinue non-essential services temporarily.
 Expand virtual services.
 Cancel or reduce premium services.
 Move to a lower-cost supplier temporarily.
 Reduce operating costs.
Moreover, for small business like Watley’s, they might speed up accounts receivable
(Munnery, 2022), such as:
 Send invoices earlier.
 Review billing cycle and payment terms.
 Break up payments into project-based weekly or bi-weekly installments.
 Request payments from past-due accounts.
 Ask for a deposit or partial payment upfront.
 Encourage or incentivize early payments.
 Accept multiple payment methods.
References
Atrill, P. and McLaney, E. (2019) Accounting and Finance for Non-Specialists
(11th Ed). Harlow: Pearson Education.
Ud-deen, H. (2020) Cash flow problems? Here's how to bounce back to cash flow
positive. Available from: https://quickbooks.intuit.com/r/cash-flow/cash-flow-
problems/#:~:text=What%20are%20cash%20flow%20problems,has%20a%20cash
%20flow%20problem. [Accessed 17 August 2020].
Munnery, J. (2022) Solving Cash Flow Problems. Available from:
https://www.realbusinessrescue.co.uk/cash-flow [Accessed from 1 April 2022].