Cash flow problems may be seen as one of the clearest early warning signs of business failure

In this article, we’ll explain what they are, how to identify them early, and potential strategies for solving them.

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What is a Cash Flow Problem?

Let’s start by defining what cash flow problems really are.

When the amount of money flowing into your business doesn’t meet the requirements for accounts payable, you run into difficulty.

Cash flow is the lifeblood of any successful company and, when the flow isn’t sufficient, you could be on a slippery slope to insolvency.

What are the Main Causes of Cash Flow Problem in Business?

  • 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

How do you Solve 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 on a regular basis, you need to take a long hard look at your business’s finances.

Working with your accountant if necessary, you should carry out a review of all the business’s income and outgoings to see where savings or improvements can be made.

This should be planned carefully. If you are going to reduce the outgoings then you must distinguish between the costs that are essential to the business and those that are 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 your business be damaged by the loss of prestige/footfall.

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 cashflow problem than to prevent a shortfall in the first place.

Creating and using cashflow 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 very simple but underused accounting tool that can help company directors avoid trouble ahead. 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 payments 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 be hugely damaging for a business’s cashflow position.

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.

Using a third-party credit checking servicing, investing in credit risk software and asking for trade references are all simple steps you can take.

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.

There are a few simple tips you can follow to increase the efficiency of this process:

  • Send invoices to customers as soon as the orders have been fulfilled
  • Always send invoices by email rather than post
  • Make sure you address the invoice to the right person – if you’re not sure who the invoice should be sent to, give the customer a call to check
  • Triple-check all invoices to make sure they’re error-free

When you send the invoice, it’s well worth asking for confirmation of receipt. That can help to reduce the likelihood of problems and delays from an early stage and shows that this is a process you take seriously.

6. Make business development a continuous process

Marketing and business development has an important part to play in maintaining regular and healthy cashflow. The feast and famine cycle will be familiar to many project dependant and seasonal businesses. They land a big contract and enjoy regular payments for 6, 12 or 18 months, but once the last invoice has been paid, they then have no immediate source of income coming into the business.

Even during your busiest periods, it’s important you maintain your marketing and business development efforts. That will help to shorten the period you’re without a significant income stream and mitigate the cashflow problems that can create.

7. Put an organised accounting system in place

All UK companies must keep full and proper financial records or they could face late filing and payment penalties and even be accused of unfit conduct as a director. However, the benefits of taking your accounting obligations seriously don’t stop there. By keeping computerised accounts that are accurate and up to date, you’ll have a snapshot of your cash position on a day-by-day basis. You’ll also be able to generate useful management reports that will provide much greater insight into your business’s financial position.

8. 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 the running of 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.

9. Consult a company rescue specialist

At Company Debt, we work with the directors of UK businesses to solve company cashflow problems and help them make the most of their trading position. We can negotiate with third parties such as creditors, suppliers, landlords and HMRC on your behalf and explore company rescue options such as Time to Pay arrangements , alternative funding options , Company Voluntary Arrangements (CVAs) , pre-pack administration and more.

How can Cash Flow Problems Lead to Business Failure

Insolvency means simply that a company cannot pay it’s bills when they fall due, or that its liabilities outweigh its assets. It’s easy to see how poor cash flow could easily push even a profitable company into this scenario.

The importance of strategic cash flow management ranks as one of the most important tools for any company director. This is why no matter how good you may be at the particular skillsets your company offers, you will also need business acumen, or to employ those who can offer this to your organisation.

How many businesses fail due to cash flow problems?
Most statistics agree that at least 60% of businesses fail during the first five years and the leading reason for this is cash-flow. Managing cash flow is therefore the single most important factor in making sure your company is not contributing to those statistics.

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 cashflow problems.