Companies, like consumers, are also at risk of experiencing financial problems. Because a business’s success is determined by its ability to generate income and be financially sound, financial problems can pose a great threat to them. There is a myriad of financial problems that companies can face and below we will discuss the factors that lead to financial problems for companies.
- Cash Flow
A business is run on sales. Every service that a company provides to consumers is treated like a sale – and therefore if sales aren’t up, cash flow will dwindle. A business needs to generate an income in order to cover their expenses such as salaries, taxes, and overheads. Therefore the moment that cash flow becomes strapped a company is headed for financial problems.
Companies may incur debts in order to set up initially, or to expand their business interests. However these debts may increase and eat away at the profitability of the company. This means that when a business becomes over-indebted it runs into serious financial problems. Luckily in these cases a business can apply for business rescue under The Companies Act. Business rescue works on the same premise as debt review, through negotiations with creditors and debt restructuring.
- Customers who do not pay debts
One of the biggest risks a company can take is to extend credit to their customers; however in an economy that does not afford consumers mush disposable incomes, it may sometimes be one of the most effective ways to generate sales. However if customers do not make payment on their debts, the company can run at a loss and run into serious financial problems, as they have effectively exchanged a service for no remuneration.
Companies that have financial problems should seek out help under The Companies Act and if possible apply for business rescue.
Article written by: Andrea van Tonder 07-2013