7 cash flow problems and how to fix them

While revenue and profit are important for business growth, cash flow is king.

In this guide, we will explore the seven most common cash flow problems. We will also reveal how to fix them and get your business moving again.

Cash flow problems are financial issues that occur whenever a business does not have enough incoming cash to cover liabilities or ongoing expenses.

Even a profitable business can encounter cash flow problems.

For example, if your business experiences a sudden increase in demand, you need to purchase more inventory and cover increased staffing costs to process the additional orders.

In most cases, these expenses would need to be paid before you receive payment from your customers. The gap between outgoings and incomings could create a cash flow problem.

Cash flow problems can affect SMEs in many ways. For example, a minor cash flow gap may result in a short-term increase in borrowing, but a serious liquidity problem could stunt business growth or even cause insolvency.

The most common issues caused by cash flow problems include:

Here is a breakdown of the most common cash flow problems and potential solutions to get your business back on track.

Cash reserves are the money your business has saved up for a rainy day. You can also use cash reserves to fund business expansion, pay debts, and cover operating expenses when cash flow slows down.

Unfortunately, many businesses do not have additional cash reserves to fall back on. Any sudden increase in operating expenses could cause liquidity issues when you do not have enough cash on hand.

You can fix the cash reserve problem with predictive forecasting. Creating a cash flow forecast can help you anticipate your cash flow each month. You can see how much money you need to cover expenses over a set period.

If saving a substantial cash reserve is an unrealistic goal, you should look at potential lending options you can access when needed.

A business can get into financial trouble if it practices excessive borrowing. Too much debt can cause interest rates and payments to build up so much that they affect your cash flow and prevent you from paying for other business expenses.

Almost every business seeks financing at some point. But it is important to choose the right type of financing for your needs and avoid borrowing more than necessary.

If debt repayments are causing cash flow issues, you can investigate refinancing current high-interest debts. A secured business loan can be an effective way to consolidate existing debt. For example, if you have credit card debt or a high-interest overdraft, a business loan may help you to reduce monthly payments and interest fees.

There are lots of potential causes for decreasing sales volume. This can be due to seasonality, broader economic conditions, and other factors. If you make fewer sales, you will naturally see cash flow reduce as less money flows into your business.

It is also important to communicate any sales volume goals with your marketing team. When your marketing team knows which products you want to focus on, they can create campaigns and promotional material that supports your sales goals.

Some industries have longer standard payment terms than others. Many businesses also offer extended payment terms to attract new customers. While this can encourage sales, it can also have a negative impact on cash flow.

In many cases, you will need to pay suppliers, wages, and overheads before receiving payment from your customers. This can cause a cash flow gap.

The best way to address late payments or outstanding receivables is to review your payment terms and collection policies. There are several ways you can encourage faster customer payments, including offering early payment discounts.

Once you have better control over your outstanding receivables, you can investigate invoice financing products. Invoice finance is a type of business finance that allows you to use your outstanding sales invoices as collateral for financing.

You can access up to 95% of the invoice value as a cash advance. Then, when your customer pays the invoice, you receive the remaining balance, less fees. In short, invoice financing helps you get paid faster for the products and services your business has already sold.

Overinvesting in inventory can tie up capital and reduce liquidity. You also risk getting stuck with products that you are unable to sell. There are many potential causes of excess inventory, including supply chain mismanagement, cancelled orders, and inaccurate sales projections.

To fix this cash flow problem, you should consider an inventory management system. This will help you balance your inventory and predict how much you should order ahead of time. It can also help you avoid understocking and leaving your customers disappointed.

Many businesses operate with seasonal business models. If you make the most of your money for the year in a single season, working capital can become stretched for the rest of the year.

Cash flow for seasonal businesses is uneven, so it is important to be proactive about your business finances and make sure you can manage the imbalance in cash flow.

Accurate cash flow projections and sales forecasting are key to managing seasonal fluctuations. You need to plan for seasonal changes, budget appropriately, and avoid overspending in the off-season without compromising your business plan.

It is also important to buy enough inventory to capitalise on the busy periods when sales peak. Trade finance can be a useful financing option if you need to raise capital to purchase inventory and pay overseas or domestic suppliers.

With increased purchasing power, you may also be able to negotiate better terms with your suppliers.

A growing business is cash hungry. As your business grows, so do your expenses. You need to be able to cover your overheads and fund new orders. That requires investment.

If you cannot raise enough capital, you risk losing out on opportunities and turning away potential customers. Invest too much, and you risk stretching your working capital and experiencing cash flow problems.

Convenient access to financing is key to sustainable business growth. Debtor finance is one of the best ways to ensure cash inflows keep up with sales. You can use your accounts receivables to secure a flexible line of credit.

Unlike a bank loan or overdraft, the credit limit increases with sales revenue. As you grow and make more sales, you can access more funding.

Most cash flow problems are predictable and preventable. There is a range of financing options and strategies you can use to increase the flow of money through your business.

If you need some guidance, we can help. We will advise you on the right strategy and arrange a financing package that gets you the funding you need when you need it. Give us a call today.