Cash flow problems are all too common, and they can often be difficult to solve. One common cause of cash flow problems is slow-paying customers. When customers take longer than expected to pay their invoices, it can put a strain on your business’s finances. Another potential cause of cash flow issues in business is seasonal fluctuations.
Certain businesses may experience a lull in sales during certain months of the year, making it difficult to maintain a strong cash flow. While cash flow problems can be challenging, there are a number of strategies you can use to alleviate them.
For example, offering discounts for early payment can incentivize customers to pay their invoices more quickly. And, by carefully monitoring your spending and budgeting for lean times, you can help ensure that your business has the resources it needs to weather any storm.
What is a Cash Flow Problem?
A cash flow problem exists when a company has more money going out than coming in. This can happen for a number of reasons, such as unexpected expenses, late payments, or slow sales. When a company experiences a cash flow problem, it can often mean that they are unable to pay their bills or meet other financial obligations.
In some cases, a cash flow problem can lead to insolvency. However, there are a number of ways to address a cash flow problem, such as working with creditors, reducing expenses, or increasing sales. By taking action quickly, many companies are able to avoid serious financial difficulties.
How Many Businesses Fail due to Cash Flow Problems?
Around 50,000 UK businesses fail every year due to a lack of cash flow. Of those companies, 65 percent say that a lack of access to funding is responsible for their cash flow issues, while many others complain that the working capital they need to run and grow their businesses is tied up in the form of late-paying customers.
The late payment culture in the UK is certainly taking its toll, with 24 percent of businesses saying that late payments are a threat to their survival. That’s the highest rate of any country in Europe
There are a number of reasons why businesses might have cash flow problems, but late payments from customers is certainly one of the most common and damaging. When a customer doesn’t pay on time, it can have a knock-on effect on the business’s ability to pay its own suppliers, which can then lead to even more serious financial difficulties. It’s a viscous cycle that often ends in failure for the small business involved
Fortunately, there are a number of ways to manage and improve cash flow, from better invoicing and credit control procedures to alternative forms of funding. However, it’s important to act quickly when cash flow problems first arise, as they can quickly spiral out of control if left unchecked.
What Types of Businesses are Prone to Cash Flow Problems?
All businesses are susceptible to problems with cash flow at one time or another. However, certain types of businesses are more prone to these problems than others. For example, businesses that rely heavily on credit sales are often vulnerable to fluctuations in customer payment patterns. In addition, businesses with a large number of inventory items may have difficulty managing their cash flow if they are unable to sell their products quickly enough.
Seasonal businesses may also struggle with cash flow during their slower months. Ultimately, any business can experience cash flow difficulties, but those that are not carefully managed are more likely to have chronic problems.
The most common types of businesses that are prone to cash flow issues include:
Construction firms – are all too familiar with the challenges of managing cash flow. Payment terms that can stretch up to 120 days are not uncommon, which can make it difficult to keep up with expenses. Employees still need to be paid and raw materials must be purchased, even while waiting for payments from customers. This can put a real strain on the business, and may even result in late payments or defaulting on loans. Construction firms need to be mindful of these risks when planning their cash flow, and should consider strategies such as lines of credit or invoice financing to help manage them.
Recruitment agencies – play an important role in the economy, connecting businesses with the talent they need to succeed. However, the industry is not without its challenges. In particular, many recruiters do not bill their clients until after a candidate has been successfully placed. Recruiters then have to wait another 30 or 60 days for the client to make a payment, depending on their payment terms. As a result, cash flow can be an ongoing concern for recruitment agencies. To mitigate this risk, many agencies require businesses to pay a deposits upfront, which can then be used to cover the costs of placing a candidate.
Wholesalers – that deal with customers that make large quantity orders often have to wait a long time for payment. This can be a difficult situation because not only do they have to wait a long time for payment, but it is also proven that the longer you go from the purchase point, the less likely you are to receive payment. This makes cash flow a constant battle for many wholesalers. In order to combat this issue, wholesalers need to be aware of their customer’s payment terms and make sure that they are able to meet those terms.
Manufacturing – is a critical sector of the economy, but it is also an industry that is often plagued by financial problems. While many manufacturers are able to maintain healthy profit margins, others struggle to make ends meet. This can often lead to a cash flow shortfall, as manufacturers find themselves unable to pay their bills on time. In addition, some manufacturers hold too much stock, which can tie up essential cash resources. And finally, giving customers too much credit can also backfire, as they may default on their payments or take advantage of extended payment terms.
Why do Businesses Have Cash Flow Problems?
Businesses have cash flow problems for a number of reasons, these can be broadly categorised into three areas:
- Poor sales
- Ineffective cash flow management
- Poor or Inadequate credit control and collections processes
Here are a number of reasons why businesses have cash flow problems and a few suggestions on how to solve your cash flow problems.
- Your customers are slow to make payments
Slow paying customers are the most common cause of cash-flow problems for small businesses. when big companies ignore the rules and impose long payment terms, it makes it difficult for small businesses to run their business effectively. Slow payments, particularly from a major customer, will create a financial burden that can make it very difficult to run your business effectively, particularly if it’s growing quickly. To avoid slow payments, work with customers who have a good reputation for paying on time and be sure to invoice them promptly.
- The businesses overheads are to high
Businesses overheads rising disproportionately to the revenue businesses generate will inevitably put a strain on businesses’ cash flow. This can become a particular problem for businesses during difficult economic times when businesses’ revenue may be static or even falling, but businesses’ overheads continue to rise. The most effective way to control businesses’ overheads is to constantly review businesses’ expenditure and look for ways to reduce businesses’ costs. This may involve renegotiating businesses’ rent, utility bills or insurance premiums, or looking for cheaper suppliers of goods and services.
- There are no cash reserves
Most new businesses have little or no cash reserves due to the simple fact that they’ve not been trading for very long. That can leave them more vulnerable to issues such as late payments, the loss of a key customer or a seasonal dip in sales. While it’s not always possible to avoid these issues altogether, there are steps that new businesses can take to minimise the risk of cash flow problems. For example, building up a strong relationship with suppliers can help to ensure that invoices are paid on time. Additionally, offering payment terms that suit your customers’ needs can help to encourage prompt payment.
- You have expensive debt
The higher level of risk associated with small businesses means that borrowing comes at a cost. That can lead to businesses being saddled by expensive debt repayments they cannot affordably repay. Cash that would be better spent growing the business then has to be redirected to service the debt, leading to a cash flow shortfall. This can have a serious negative impact on the growth and viability of the business. It is therefore important for small businesses to carefully consider their borrowing options and ensure that they are taking on debt that they can comfortably repay.
- You’re holding too much stock
One of the challenges that manufacturers and wholesalers face is holding too much stock. By holding stock, they can more quickly fulfil orders. However, if they hold too much stock, it can end up sitting on shelves, tying up their cash and costing them money to store. One way to manage this is to use a just-in-time inventory system, where stock is only ordered and delivered as needed. This can help to reduce the amount of stock that needs to be stored, as well as the associated costs. Another option is to offer discounts for bulk orders, which can help to move excess stock more quickly.
- Ignoring your financial statements
Ignoring your financial statements is like driving blindfolded; eventually, you’re going to crash. Whether you’re a solopreneur or managing a team of employees, accurate bookkeeping and regular financial statement review is essential to keeping track of the money coming in and going out of your business. Without this critical information, it’s difficult (if not impossible) to make sound decisions about where to allocate your resources or how to grow your business.
- 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. If you sell a product or service to a customer who does not pay, that is a bad debt. Common causes of bad debt include customers who default on their payments, fail to pay their invoices on time, or simply refuse to pay. While it is important to extend credit to customers and give them the opportunity to purchase your products or services, it is also important to carefully consider whether a customer is likely to default on their payments. If you are concerned about a customer’s ability to pay, you may want to consider requiring a down payment or asking for collateral.
How do you Solve More Serious Cash Flow Problems?
If you are facing serious cash flow problems, it is important to take immediate action to address the issue. One potential solution is to review your expenses and see if there are any areas where you can cut back or eliminate unnecessary spending. This could include reducing your budget for entertainment, dining out, or other non-essential expenses.
You may also want to consider negotiating with creditors or suppliers to extend payment terms or lower your interest rates. Another option is to consider taking out a loan or seeking additional financing from a lender or investor. It is important to carefully evaluate the terms and conditions of any loans or financing options before committing to them, as they may come with additional costs and obligations.
Finally, it may be helpful to seek the guidance of a financial advisor or professional to help you assess your options, methods and develop a plan to address your cash flow problems.
Need more help?
If your business is suffering from issues, one way to avoid cash flow problems is by the use of invoice factoring, if you would like to know more about this type of finance please complete the online enquiry form.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.