Cash Flow Problems – What Can I Do?

Cash flow problems start when your debt payments begin to outweigh the money that is coming in.

These can be critical to any small business, especially the ones that are faced with insolvency proceedings. Improving your cash flow when battling against insolvency is no easy task, but one you should try to complete.

Cash flow problems within businesses are usually closely connected to insolvency, as it is often the reason behind why a business cannot meet its financial liabilities any longer we look at how to identify them early, and potential strategies for solving them.

What is a Cash Flow Problem?

A cash flow problem occurs when a company has insufficient cash to cover its short-term expenses, such as salaries, rent, and inventory purchases. Cash flow is the amount of cash moving in and out of the business, and a cash flow problem arises when there is a mismatch between the timing of cash inflows and outflows.

Understanding what is cash flow and how it impacts a company’s finances is essential for identifying and resolving cash flow problems, which can lead to financial distress and even insolvency if left unaddressed.

Cash flow is everything to a company, when the flow isn’t sufficient or reduced, its time to take look at if technically the business is insolvent.

Directors need to identify the issues and an early stage to prevent the opening of the entryway for various future problems which can prompt formal insolvency unless you choose to look for help from professional insolvency specialists at the soonest opportunity.

You should be straightforward with yourself and face up to figures before you – it could be only a brief issue that can without much of a stretch be settled.

However, it is possible you’ve been wilfully ignorant and ignored some serious problems that will only spread further if you allow them to. When an organisation starts encountering financial issues the greatest concern for company directors is being confronted with a winding up petition.

How Many Businesses Fail due to Cash Flow Problems?

UK businesses fail for a variety of reasons, but cash flow problems are one of the most common. In fact, a recent study found that nearly 60% of businesses that fail do so because of cash flow issues. There are a number of factors that can contribute to cash flow problems, such as late payments from customers, unexpected expenses, and seasonal fluctuations in demand.

This can be especially challenging for small businesses, which often have limited resources and less access to capital. As a result, it’s essential for business owners to keep a close eye on their cash flow and take steps to ensure that they have enough money on hand to meet their obligations.

By understanding the risks and taking proactive measures to mitigate them, business owners can increase their chances of success.

Read more: Why is my business not making money?

What Types of Businesses are Prone to Cash Flow Problems?

Start ups are the most common type of business to have cash flow problems. This is because they have a lot of expenses when they are first starting out, but not a lot of money coming in. They may also have trouble getting loans from banks, which can make it difficult to cover their expenses.

Seasonal businesses can also have cash flow problems, since they may have a lot of expenses during their busy season but not as much income. Businesses that are heavily reliant on inventory can also have cash flow issues, since they may need to purchase a lot of inventory upfront but may not get paid for it until later.

In general, businesses that have high operating costs and/or long payment terms are more likely to have cash flow problems. Managing cash flow is essential for all businesses, but it can be especially challenging for businesses that are prone to these types of issues.

Businesses that are prone to cash flow issues include:

• Construction firms – often have to wait a long time to get paid. Payment terms of 120 days are common, and this can put a real strain on cash flow. During this time, employees still need to be paid and raw materials must be purchased. This can make it difficult for construction firms to stay afloat. Construction firms often have to take out loans to cover the gap between when they incur expenses and when they receive payment. This can be a risky proposition, as it can lead to even more debt if the firm is not able to get paid on time. Construction firms need to be mindful of their cash flow in order to avoid financial difficulties.
• Recruitment agencies – are businesses that provide a service to companies by sourcing and vetting candidates for open positions. Many of these agencies operate on a contingency basis, meaning they only bill their clients after a candidate has been successfully placed. This often means that recruiters have to wait 30 or 60 days for payment, which can put a strain on cash flow. In order to improve their financial situation, some agencies charge an upfront fee, also known as a retainer. This allows them to receive payment immediately and gives them more certainty when it comes to budgeting.
• Utility providers – are responsible for supplying us with electricity, water, and gas. This is a vital service that we rely on every day, yet many people do not think twice about how their utility provider is chosen or how their bill is paid. However, Utility providers are businesses that need to make a profit to survive. This means that they need customers to pay their bills on time. When customers don’t pay their bills, it puts small utility providers under pressure. Although service can be cut off, this does not make up for the utilities that have already been provided but not paid for.
• Wholesalers – that provide products to customers that make large quantity orders often have to wait a long time for payment. This can create a strain on cash flow, as it can be difficult to predict when payment will be received. In addition, customers that make large orders are often less likely to pay on time than those that make smaller orders. As a result, wholesalers may find themselves constantly struggling to manage their cash flow.
• Manufacturing – is a critical sector of the economy, but it can be a volatile one. fluctuating demand, high overhead costs and thin profit margins can all lead to cash flow shortfalls. When production falls behind demand, manufacturers may be tempted to build up inventory in order to meet future orders. However, this can tie up working capital and make it difficult to pay bills in the meantime. Another common cause of cash flow problems is extending too much credit to customers.

Why do Businesses Have Cash Flow Problems?

A business may have cash flow problems for a variety of reasons. Perhaps the company is growing rapidly and has not yet generated enough revenue to cover its costs. Or maybe it is carrying a lot of debt, which leaves less money available to cover day-to-day expenses. In some cases, a business may simply be mismanaging its finances, incurring unnecessary costs or failing to collect payments from customers in a timely manner.

• Poor sales
• Ineffective cash flow management
• Lacking or poor credit control and collections processes

Whatever the cause, cash flow problems can be devastating for a business, leading to late payments, reduced inventory, layoffs, and even bankruptcy. Fortunately, there are a number of steps that businesses can take to improve their cash flow. These include reducing expenses, increasing revenues, and improving collections.

By taking these measures, businesses can ensure that they have the resources they need to remain afloat.

• Your customers are slow to make payments

Customers are slow to make payments, particularly if it’s growing quickly. This can create a financial burden that makes it very difficult to run your business effectively. The most common cause of cash-flow problems for SMEs is when customer invoices take weeks or even months to be paid. Big companies are often accused of ignoring the rules in this regard, imposing long payment terms and still making late payments.

The solution: If you’re struggling to get paid on time, there are a few potential solutions you can try. One is to offer an early payment discount. This may incentivise customers to pay their invoices more quickly, though it will also reduce your profit margin. Another option is invoice finance. This line of credit releases up to 95 percent of the value of an invoice within 24 hours of the invoice being sent to the customer. Once the invoice is due, the finance provider will collect the payment from the customer and pay you the balance, minus their fee. Whichever option you choose, make sure you communicate clearly with your customers about your expectations for payment.

• The overheads are too high

It’s no secret that overheads can be a real problem for small businesses. When overheads are too high, it puts a strain on cash and makes it difficult to generate profits. This is often because businesses don’t have the same economies of scale as large businesses, so their overheads are more expensive relative to their revenue.

The solution: The best way to reduce overheads is to audit your expenses and only cut the costs that will not directly impact on sales. That could be by reducing your rent, bringing the accounting function in-house or looking for cheaper utility providers. By taking this approach, you can reduce your overheads without damaging your sales.

• There are no cash reserves

Most new businesses have little or no cash reserves. This can leave them more vulnerable to issues such as late payments, the loss of a key customer or a seasonal dip in sales. The lack of cash reserves can also hamper a business’s ability to invest in new opportunities or take advantage of discounts for bulk purchases.

The Solution: To overcome these challenges, new businesses need to be diligent about managing their finances and striking a balance between income and expenditure. They should also look for opportunities to increase their revenue, such as offering discounts or promotions. By taking these steps, new businesses can build up their cash reserves and become more resilient to unexpected challenges.

• You have expensive debt

Small businesses often have to pay more for borrowing than larger businesses. This is because they are seen as being a higher risk, and so lenders charge a higher interest rate to compensate for this. This can lead to small businesses taking on expensive debt that they then struggle to repay. The repayments can place a strain on cash flow, as they divert money away from other areas such as growth and marketing. This can then lead to the business getting into financial difficulty and potentially having to close down.

The solution: Only borrow when it’s absolutely essential, and be very cautious about the finance agreements you enter into. If your cost of debt is already too high, consider refinancing the loan with a deal that offers a lower interest rate or a longer repayment term. Alternatively, if you have multiple debt products, a debt consolidation loan that combines all of your loans into a single, more affordable repayment could free up the cash you need. either way, be mindful of your borrowing and make sure you’re always staying on top of your repayments.

• You’re holding too much stock

Holding too much stock is a common problem for manufacturers and wholesalers. holding stock can help to fulfill orders more quickly, but if stock levels are too high, it can end up sitting on shelves, tying up your cash and costing you money to store. the ideal solution is to find a balance between holding enough stock to meet customer demand, without holding so much that it becomes a financial burden. however, this can be difficult to achieve, especially if demand is unpredictable.

The solution: One way to reduce the risk of holding too much stock is to use just-in-time inventory management, which involves only ordering the amount of stock that you need to meet current demand. another option is to use a consignment arrangement, where the supplier only ships the goods once they have been sold to the customer. both of these options can help to reduce the cost of holding too much stock.

You ignore your bookkeeping and financial statements

It’s no secret that good bookkeeping and financial management are essential for any business. After all, if you don’t know where your money is going, it’s very hard to make sound decisions about where to allocate your resources. However, what many business owners don’t realise is that ignoring your bookkeeping and financial statements can also have some serious consequences.

The solution: While many business owners enjoy the challenge of keeping their own books, there are plenty of good reasons to outsource this task to a professional. For one thing, it frees up your time to focus on other aspects of the business. Additionally, a bookkeeper can often spot potential problems before they become full-blown crises. For example, if you’re consistently failing to keep up with invoicing, you could run into cash flow issues down the line. By hiring someone to handle your bookkeeping, you can avoid these kinds of pitfalls and keep your business on track.

Too much bad debt

Too much bad debt can be extremely damaging to businesses of every size, but particularly smaller companies that do not have the revenues or reserves to absorb the loss. This is because when a customer does not pay for a product or service that they have received, the business is essentially losing out on revenue that they were counting on. This can quickly lead to a cash flow problem, as the business will have less money available to cover expenses and pay other customers who do pay on time. In addition, bad debt can also damage the business’s reputation, making it harder to attract new customers.

The solution: It’s important to carry out thorough credit checking before extending credit to any customer. This includes looking at their payment history, credit score, and overall financial stability. For customers that don’t have a solid track record or are newly established, it’s best to ask for payment upfront. Although this may cost you some sales, it’s better than losing money on customers that were deemed risky to begin with. By taking these precautions, you can help protect your business from the financial burden of non-payment.

How do you Solve More Serious Cash Flow Problems?

If your business is struggling with cash flow, it’s important to take action quickly. There are a number of steps you can take to improve your situation and get your business back on track. One option is to offer discounts for early payment. This can help encourage customers to pay their invoices more promptly.

Another possibility is to line up additional financing, such as a short-term loan or lines of credit. This can provide you with the cash you need to meet your obligations and keep your business operating smoothly. In addition, it’s important to review your expenses and see where you can cut costs. Sometimes making small changes can make a big difference in your overall cash flow. By taking action and being mindful of your spending, you can solve cash flow problems.

When a business is struggling to make ends meet, it can be tempting to put off seeking professional help. However, by doing so, you may only be making the situation worse. An insolvency practitioner will be able to assess your business’s financial situation and advise you on the best course of action. That could include accessing alternative lines of credit, going into administration to restructure the business or entering into a formal debt repayment agreement with your creditors known as a company voluntary arrangement (CVA). Taking action early on can make all the difference in saving your business. So, if you’re facing financial difficulties, don’t delay in seeking professional advice.

Read more: What to do if your company is running out of cash

Receive Your Free Consultation

Are you struggling to keep up with your bills? Are you worried that your business may have to close its doors? If so, you are not alone. Cash flow problems are one of the most common reasons for businesses to fail. However, it is important to remember that cash flow problems do not need to be the end of your business.

There are a number of options available to help you get back on track. An initial consultation with our licensed insolvency practitioners is completely free of cost and obligation, so get in touch today for expert assistance. We will work with you to develop a customised plan to address your cash flow problems and help you get your business back on track

Conclusion

Cash flow problems usually start with a mismatch between when income is received and when expenses must be paid. This can occur for a variety of reasons, such as a slowdown in sales, unexpected expenses, late payments from customers, or an increase in fixed costs.

As cash reserves shrink, it becomes harder for a business to meet its financial obligations on time, leading to a vicious cycle of missed payments, increased debt, and reduced credibility with suppliers and lenders. In some cases, the root cause of the cash flow problem may be poor financial planning and mismanagement of available resources.

In other cases, external factors such as a recession or a natural disaster can cause a sudden and significant reduction in cash flow. Regardless of the cause, cash flow problems can quickly escalate and become a major threat to a business’s survival if not addressed promptly.