Every business will undergo a cash flow issue at some time or another. The problem may stem from many causes and vary in intensity, but it is imperative to find the best solution quickly in any scenario.
If cash flow issues are left to get out of hand, they will disrupt your operations and cause debt you can’t resolve. Swift and effective action resolves the problem before it has a chance to worsen, protecting your company from the harmful effects.
Our guide explores the typical cash flow problems your business may face and how to address them.
- Your customers aren’t paying you on time
- Your finances aren’t performing as expected
- There’s a temporary decline in sales
- You underestimated your start-up costs
- The business has grown rapidly
- You need to cover a large expense
- Your profit margins have reduced
- The expense of imports and exports applies pressure
- You have high costs or overheads
Your customers aren’t paying you on time
Late payment plagues many SMEs today, affecting around 58% of businesses. It has seismic repercussions on cash flow.
When your customers pay you late – or not at all – it leaves a cash gap. In some cases, companies become unable to meet their financial commitments – including supplier costs, salaries, etc. This threatens productivity while potentially leaving these businesses in debt if they fall behind on owed payments.
The solution: invoice finance and stringent credit management
If a lack of customer payment leaves a funding gap, it’s crucial to fill it before it disrupts your business.
Invoice finance is a commonly used solution in these scenarios, using unpaid invoices as collateral to raise funding. A lender will offer you up to 90% of the total value of your outstanding invoices upfront, which will boost your cash flow while you await customer payment.
It is worth noting that your customer must repay you in good time to pay off the invoice finance. If you consistently have issues with customer payments, it might be time to look at your credit management protocols. Good credit control practices should ensure customers are clear when payment is due and have backup options if they refuse to pay.
Your finances aren’t performing as expected
When starting your business, you should have a trajectory you expect your finances to follow. This trajectory should balance income and outgoings effectively, allowing you to maintain healthy cash flow.
If your finances do not perform as expected – for example, expenses are higher or revenue lower than predicted – it may leave you with poor cash flow.
The solution: an adequate cash flow forecast
Temporary increases in outgoing costs or falls in income will happen. However, if your financial performance drastically differs from what you expect, especially if it happens over several months, it’s a sign your predictions may be incorrect.
Creating an accurate cash flow forecast is integral to understanding and planning your finances. Aim to build one for your business, considering the various financial factors.
There will be an element of continuous improvement associated with your cash flow forecast. As you compare your projections to reality, you will adapt them and eventually improve the accuracy of your estimations.
There’s a temporary decline in sales
Although the ideal situation would be growing sales every month, companies will face fluctuating sales figures, such as in off-peak periods or due to external influences.
A temporary decline isn’t usually too much to worry about (if it’s a long-term decline, you might need to reconsider your value proposition). However, it will tighten your cash flow until sales pick up again.
The solution: stock finance or a short-term loan
If you are a product-based business, stock finance could prove highly valuable in managing cash flow during low-sales periods. If you aren’t selling, you may have an excess of stock in your warehouse, which could be used to unlock funding.
There are a few caveats to stock finance. You need an inventory worth a substantial amount, and it is expensive to have your stock valued. It also takes time to be approved, so it’s generally best to have a long-term stock finance facility set up. However, it is also an effective way of unleashing funding in your unused inventory.
A short-term loan is another option. It will see you given a loan for a short period, providing the needed injection of capital to keep things moving until your sales recover.
You underestimated your start-up costs
Starting a business requires funding. When you begin, you should have worked out the costs involved and raised finance to allow you to launch your venture.
If you underestimate the funds you need for the early stages of your business, it could quickly lead to restricted cash flow. If left unaddressed, this will cause further financial issues that threaten the longevity of your company.
The solution: a business loan or investment
There are many solutions if you need to cover a funding gap during the start-up period.
Firstly, consider a business loan. These provide lump sums of funding for various purposes, which you repay over a set period. This means you will receive the capital you need to cover your starting expenses – then, once you begin to generate revenue, repay the balance.
Alternatively, seeking investment for your start-ups – such as through angel investors or venture capital – is a great way to access the finances you need to become established alongside hands-on support. You also do not need to repay, but you will need to give up equity in your business.
The business has grown rapidly
Growth is positive, indicating high-level demand for your products and services. However, growing too quickly throws your finances off-balance, especially if you absorb greater costs to address rising demand before your revenue catches up.
If you don’t manage cash flow alongside your growth, you could end up in a poor financial position where you cannot pay the expenses required to meet demand. It will also make your expansion hard to sustain.
The solution: a careful growth plan and a line of credit
Firstly, you should ensure you have a sensible growth strategy before growing. This will enable you to take a tactical approach in a timeframe that doesn’t overwhelm your company. Part of this will include identifying the financial implications of your expansion and having the resources you need to manage growth.
A line of credit from a bank, such as through a loan, overdraft or credit card, could also prove helpful, however the sums are unlikely to be large. The issue with rapid growth is that you often need to cover the costs of increased demand before receiving customer payment.
Cash flow solutions such as invoice discounting and trade finance will also assist you as you grow.
You need to cover a large expense
A significant expense, such as machinery, company vehicles or other assets, will strain your cash flow. It is particularly harmful if the cost is unexpected, like replacing a broken item. It’s also commonly required if you are expanding your operations.
Covering such expenses runs the risk of draining your reserves and limiting capital.
The solution: leasing or hire purchase
Leasing and hire purchase are two options that make acquiring assets more affordable. With each, you will receive equipment in exchange for regular instalments plus interest.
In a hire purchase arrangement, you have the option to own the asset at the end of the term. You don’t have this option when leasing, though you may choose to take out a new contract instead. You will access the necessary equipment in either scenario without paying for it upfront.
An alternative option is a business loan which may be put towards an expense – but be confident you will meet the loan repayment schedule afterwards.
Your profit margins have reduced
Business profit is often used to build cash reserves, fuel growth and cover unexpected expenditures. If your profit margins (gross or net) are reducing, there’s less money left to utilise. In the long-term, it might see your cash flow tighten too.
The solution: understanding the cause and revisiting your finances
The first step to addressing reduced profit margins is understanding why they’re shrinking. There may be several causes, including rising costs or falling revenue.
Once you know the ‘why’, it’s much easier to address the problem and revisit your finances. Common actions include conducting an audit to minimise operational costs or creating a sales strategy to revitalise demand. It is also worth adjusting your pricing model to pass on the costs, though aim to remain competitive.
If the cause of the profit loss is temporary, like a period of low sales, a cash flow loan or invoice discounting may plug the gap until things get back on track. However, it is crucial to find a long-term solution if it is an ongoing issue.
The cost of import and export applies pressure
Exposing your company to the global marketplace carries financial risk. There is often a gap between importers and exporters, requiring goods to be sent before payment is received.
There is also the administrative burden associated with importing and exporting, which will threaten cash flow if not managed efficiently.
The solution: trade finance
Trade finance closes the gap between importers and exporters, enabling productivity across the sales cycle. Importers will use it to secure the overseas supplies they need to fulfil domestic demand. In contrast, exporters use it to cover the costs associated with orders they will send to customers abroad.
Trade finance has many benefits, including reducing the risk associated with trade and allowing business growth. It will keep everything moving and ease cash flow, meaning more companies are eligible for trade.
You have high costs or overheads
Every company has costs. Without them, you wouldn’t be able to operate. Your income should outweigh outgoings, enabling you to produce profits and maintain positive cash flow.
If your costs (including overheads) become too high, it will quickly lead to cash blockages, making it harder to meet financial commitments or reinvest in your company.
The solution: A cost overhaul
Rising costs are never wanted. It will be out of your hands in many scenarios, but there are ways to readdress the balance.
Firstly, you must ensure your operational strategy is financially strong. It should include sensible costs that contribute to profitability while offering the quality customers expect.
If your costs are too high – whether that’s the result of a poor strategy or external factors –conduct audits to see where they may be lowered. Comb through your expenses, seeking areas where costs may be reduced or eliminated if they are surplus to requirement.
Examples of ways to reduce costs include:
- Shopping around suppliers to find more competitive deals
- Using alternative materials and supplies with a lower cost
- Creating more cost-efficient processes
- Outsourcing functions to contractors
Remember to conduct audits regularly as part of your ongoing cost management. This will enable you to stay on top of your expenditure consistently.
Find the right solution for your cash flow problem
Managing cash flow is crucial for the long-term success of your business. By addressing cash flow issues quickly, you will prevent them from spiralling out of control, leading to debt and disruption.
Finding the right solution is crucial. With many reasons behind cash flow problems, solving the root cause will provide relief while preventing it from reoccurring.
If you are experiencing cash flow difficulties, our team will guide you to an ideal resolution. We will discuss your business and financial health to pinpoint the best fix while connecting you to appropriate funding sources.