How to Identify and Solve Cash Flow Problems

Cash flow problems are one of the clearest early warning signs of business failure.

We explain how cash flow problems often arise, how to fix cash flow issues and how we can help.

With a team of highly experienced small business advisors, we are specialists in guiding our small business clients to turn around cash flow problems and in the unfortunate event you have reached insolvency, our Insolvency Practitioners can advise on the best available options.

What is a Cash Flow Problem?

A cash flow problem occurs when a business has insufficient cash to meet its financial obligations, such as paying bills, suppliers, or employees. In other words, the business is spending more cash than it is receiving, which can lead to a shortage of cash on hand.

Cash flow problems can arise for various reasons, such as a decrease in sales, unexpected expenses, or a delay in getting paid.

If a cash flow problem is not addressed promptly, it can lead to more serious financial difficulties, such as insolvency.

Symptoms of Company Cash Flow Problems

Here are some typical signs your company is experiencing cash flow problems:

• Seasonal fluctuations in sales
• A failure to send invoices out and collect customer payments on time
• An over-reliance on a small number of customers
• Holding too much stock
• Low-profit margins
• Growing too quickly and putting pressure on short-term finance
• A funding facility that does not meet the business’s changing needs
• Poor financial planning
• An undisciplined approach to spending
• High overheads such as rent and utilities
• Bad debts
• Poor credit control procedures and credit checks

What is the impact of cash flow problems?

Continuous poor cash flow leads to a breakdown in the smooth running of the business, including problems paying suppliers, the inability to pay employees, and creditor pressure. We’ll explain more below:

Cash flow problems can have a significant impact on a business, affecting its ability to operate effectively and meet its financial obligations. Here are some of the key impacts of cash flow problems:

1. Can’t Pay Debts: Cash flow problems can make it difficult for a business to pay its bills, loans, or other financial obligations on time. This can lead to late fees, interest charges, and damage to the business’s credit rating.
2. Stagnant Growth : A company that’s always fire-fighting can’t grow. You’ll miss out on hiring new staff, opening new locations, or investing in new equipment or technology.
3. Legal Action from Creditors: If they get tired of being paid late, creditors may take legal action to recover the money owed to them. This can lead to court proceedings, asset seizures, and damage to the business’s reputation.
4. Insolvency: In severe cases, cash flow problems can lead to insolvency or bankruptcy, where the business is unable to meet its financial obligations and is forced to close its doors. This can result in job losses, and financial hardship for owners and investors.

The depletion of the working-capital cycle is a typical precursor to insolvency so you need to take the situation seriously, consult with your financial advisor, and put meaningful steps in place to remedy the situation.

6 Ways to Solve Company Cash Flow Problems

1. Access a flexible line of credit

Finding a flexible line of credit that gives your business quick access to funds as and when they’re required could be a simple way to ride out a cashflow storm.

Short-term business loans, company credit cards, overdraft facilities and invoice finance can all provide quick access to cash. The key is to find the source of finance that’s the right fit for your business and ensure you can easily afford the interest charges now and in the future so you don’t put further strain on your cash.

You may find that an ongoing line of credit, such as an overdraft facility or invoice factoring, is a better option than a short-term loan if you don’t need to access a large amount of cash right away. It can then be used as a cash cushion as and when it’s needed.

2. Audit your Finances

If you’re experiencing cash flow difficulties regularly, you need to take a long hard look at your business’s finances.

This should be planned carefully. If you are going to reduce the outgoings, you must distinguish between the costs essential to the business and those not.

For example, putting a cap on employee overtime might reduce the costs of the business, but how would it impact income? Similarly, moving to a cheaper location might reduce the money you spend on rent, but would the loss of prestige/footfall damage your business?

Similarly, there may be simple improvements you can make to increase your income. Introducing a complementary product line or service may be an easy way to boost your revenues, but what additional costs will that create?

3. Create Cash Flow Forecasts

There’s no better way to solve a cash flow problem than to prevent a shortfall in the first place.

Creating and using cash flow statements regularly will let you know how much cash reserve the business will need in the coming months. If a seasonal dip in sales or a one-off requirement for cash is expected in the months ahead, you can take the necessary precautions now, such as organising a line of credit, so there’s no negative impact on your business.

Cashflow forecasts are a simple but underused accounting tool that can help company directors avoid trouble. However, they must be updated regularly with the actual figures rather than those forecast to increase their accuracy in the future and create a tool you can rely on.

4. Negotiate Favourable Credit Terms with your Suppliers

Another step you could take is to negotiate improved payment terms with your trade partners or suppliers.

If your customers pay you within 60 days of a product or service being delivered, but you pay your suppliers within 30 days, you’ll have a period of 30 days where you’ve paid more money out than you’ve recouped. If not planned for, that can easily create a cashflow shortfall.

If you have a good payment history with your suppliers, they may be open to extending your payment terms. That would allow you to hold onto the cash for longer and reduce the risk that you’ll be left out of pocket. Most suppliers would prefer to provide improved payment terms rather than lose you as a customer.

5. Prioritise Credit Control

Late payments from customers and bad debts (when payments aren’t made at all) can hugely damage a business’s cash flow.

In fact, if you rely on just a small number of customers, a single unpaid invoice could be enough to make your business insolvent . That’s why you should take the time to check the creditworthiness of prospective customers before you agree to work with them.

You can take simple steps to use a third-party credit checking service, invest in credit risk software, and ask for trade references.

You should also formalise the process of chasing late payments and making sure your debtor book is up to date. Taking steps such as charging interest on late payments and offering discounts for early payments can help to increase the likelihood that payments will be made on time.

5. Invoice Quickly and Accurately

Some of the common causes of cashflow problems are out of the hands of your business. Yes, you can reduce the risks, but if a customer decides they aren’t going to pay, your only option is to take legal action, which will take time and leave you out of pocket in the meantime. However, sending out invoices quickly and accurately is one part of the process you have complete control over.

6. Free up Assets

Is your business asset-rich but cash-poor? In that case, looking critically at some of the assets your business owns and selling those that aren’t absolutely essential to running your business could be an easy, although not necessarily quick, way of increasing your working capital. If you’d prefer not to sell a business asset, leasing it out could bring in additional income while allowing you to retain ownership.

If you’re experiencing regular cashflow problems that are making it difficult to make payments when they’re due, your business could be on the brink of insolvency. In this case, immediate professional assistance from a licensed insolvency practitioner is advised before it’s too late. Once your business is insolvent, you must legally prioritise the interests of your creditors which completely alters your freedom to take action.

Need Help?

Then get in touch with our team of turnaround practitioners today. We will provide a free, no-obligation consultation to help you solve your company’s cash flow problems.  

Cash Flow Problem FAQs