Cash flow issues can be a significant stumbling block for businesses both large and small. When cash reserves run dry and you have debts to settle, you face a situation where one wrong move could lead to serious financial consequences. Thankfully, provided you act quickly and decisively, there are ways to recover your business and restore it to good financial health.
There are lots of different factors that can result in company cash flow problems, and working with an expert is often the best way to make sure you identify the root causes of the problem. From there, you can choose solutions that will address these underlying problems and give your company the best chance to thrive.
Here, the experts at Company Insolvency Advice provide a comprehensive overview of the types of internal and external forces that can negatively affect cash flow and highlight some of the short-term and long-term solutions that can be used to improve the situation.
It is important to use a combination of these approaches and to carefully consider how they will affect your business before making any changes. If you need support in developing a strategy to manage cash flow more effectively, or advice on the solutions that might be suitable for your business, contact Company Insolvency Advice today. Call us on 0800 999 0666 or use our online enquiry form to request a call back at your convenience.
What are the most common causes of cash flow issues?
There are many common challenges that can lead to business cash flow problems. Some of these are internal factors that the business owner can control, while others are external and outside the scope of the company. However, no organisation’s financial circumstances are entirely caused by one factor or another. Having a strong understanding of the elements at play can help organisations get to grips with the challenges they are facing and implement a comprehensive combination of solutions.
Some of the most common factors that affect business cash flow include:
- Poor sales or revenue: Lacklustre sales figures directly affect the amount of cash flowing into the business, making it challenging to meet various financial obligations. There may be internal ways for a business to address this, but it also comes down to a variety of external factors.
- High overheads: If costs for rent, utilities, and wages go up, this can erode cash reserves. This can be a bigger problem if these outgoings are not balanced by incoming revenue and result in poor cash flow.
- Late payments: When clients or customers delay payments, this can significantly hamper cash flow. If your business operations work on an invoice system, this is a particular risk. While this is fundamentally under the control of the customers or clients in question, there are also steps that companies can take in these cases – for example, by changing payment terms, offering early payment incentives or chasing up payments more proactively. This is one of the most common cash flow problems for companies with poor credit control procedures and can lead to more serious consequences.
- Seasonal fluctuations: Some businesses and industries experience periods of low activity, affecting companies’ cash flow. For instance, a retail store may have excess cash around Christmas but face a shortfall at other times. Careful cash flow management can account for this kind of seasonal dip and protect the company from serious consequences, but only if this possibility is foreseen and accounted for.
- Poor inventory management: Overstocking inventory ties up cash that could be used elsewhere. Conversely, understocking can lead to missed sales opportunities. This is within an organisation’s control and care should be taken when planning to avoid the potential effects of inventory management errors.
- Debt repayments: High interest rates and strict repayment terms on borrowed capital can cause a cash drain. Companies need to manage all aspects of their finances carefully to avoid cash flow problems and to address them successfully when they arise.
- Inaccurate financial forecasting: Failure to properly forecast finances can lead to poor decision-making and financial strain. Cash flow forecasts should be prepared carefully and if you are concerned about cash flow difficulties, it may be wise to work with an experienced financial advisor to better manage this process.
- Lack of reserve funds: Without an emergency fund, unexpected costs can become a crisis. If cash flow problems have already arisen, it may be too late to implement changes in this area, but it is something to consider in situations where your business has successfully overcome cash flow problems. If you are in a position to pre-empt and avoid this type of situation, implementing and managing an emergency fund may also be an important step in your financial planning.
- Unplanned expenses: Unexpected costs like equipment breakdown or legal issues can quickly deplete cash reserves. This is an area where a cash flow reserve can help to prevent a company cash flow problem, provided it is managed effectively.
- Growth mismanagement: Sometimes, growing too quickly can strain cash reserves as the business tries to scale operations faster than cash flow permits. This is a problem that small businesses in particular should consider and account for when forecasting and planning ahead.
- Operational inefficiencies: Inefficient processes can result in wasted resources, ultimately affecting cash flow. This is one area where companies can make the biggest differences even with small internal changes.
- Market competition: Increased competition can put downward pressure on prices. This affects profitability and, by extension, cash flow. While businesses cannot control their competitors’ actions, they can take actions to stay competitive and keep money coming in.
- Economic factors: Economic downturns or changes in market conditions can reduce consumer spending, thereby affecting sales and cash flow. It’s important to save money and create a cash cushion for these scenarios, but even this approach will not always be enough.
- Regulatory changes: Changes in legislation, such as tax hikes or new compliance requirements, can result in unexpected expenses. These changes will usually affect an entire industry at once, but businesses that are better prepared will have more cash and a higher chance of weathering the storm.
Even with all of these examples, this list is not comprehensive. Instead, it serves to illustrate the number of forces at work that can influence a business’ cash flow. This is why, when a cash flow problem occurs, it is vital to consult an expert for advice. Without a thorough understanding of the breadth of considerations that can hinder or help a business’ cash flow, it is impossible to implement the most effective solution.
How can a company solve cash flow problems?
Because there are many different cash management problems (as we have listed above), there is never a one-size-fits-all solution. Resolving the issue will depend on what is causing it, and often, that is a combination of different factors. A cash flow forecast can help to identify some of the areas in which your organisation is missing opportunities or where procedures are not working effectively.
Working with an expert to develop a plan is the best way to identify and account for all of your needs – it tells you how much cash you need, where your shortfalls are originating, and what you can do to create more positive cash flow for your company. It can also be an opportunity to discuss funding opportunities that could provide a short-term cash boost.
There are many ways to solve cash flow problems, and you will usually need a combination of solutions. Some will be effective at creating a short-term cash injection to help you push through a difficult period, while others will boost the company’s health over time and help it to weather economic changes and pressures that might otherwise be a threat.
Below, we have broken down some of the solutions that we might recommend – although, as we have said, choosing the most suitable solution is about fully understanding where your cash flow problem is coming from.
There are several strategies you can try to bring in more cash on a short-term basis. Some of these solutions will be unsustainable, while you may find that others work better as a permanent change to your cash flow management.
- Accelerate invoicing and collections: Shorten payment terms and actively follow up on overdue accounts. Offering discounts for early payments can also encourage quicker settlements. Chasing payments takes resources, but this might be the right approach for certain businesses.
- Prioritise payments: Hold off on less-essential expenditures and focus on meeting the most urgent financial obligations first. This requires the business owner to realistically and thoroughly assess the company’s financial situation, and consulting with an expert is often the best way to ensure you have considered every angle.
- Sell assets and cut costs: Sell off unused or redundant assets to quickly generate cash. Temporarily halt activities or services that are not essential to the core business, and look to minimise overhead costs wherever possible.
- Invoice finance: Strategies like invoice factoring or discounting can bring in cash in the short term, although their viability depends on the agreement you are offered. This can also be an opportunity to outsource the responsibility for chasing outstanding receivables and late payments.
- Financing and investment: Consider financing options to cover cash-flow issues and bridge the gap. Business loans or investment could be a useful short-term solution in some cases, but it is important to manage this carefully. You must also resolve the causes of cash flow problems, as simply borrowing more money without addressing the underlying causes can lead to much bigger problems.
Sometimes, businesses fail to address cash flow problems with the comprehensive solutions that are needed. Taking one or two of the above steps might restore positive cash flow in the short term, but won’t prevent problems from arising again in the future. This might also obscure a more important concern, so it’s vital to analyse the situation, prepare an accurate cash flow forecast to enable you to prepare for the future, and consider long-term changes that might help your organisation resist future challenges.
As with short-term solutions, it’s important to evaluate the nature of the problem you are facing before making any changes to your long-term strategy. Some of these approaches could make cash flow management more difficult and lead to a bigger cash flow problem if they are not the right solution for your needs.
- Review pricing strategy: Consider adjusting pricing to better reflect the value you provide. Increasing profit margins is effective, but must be managed carefully, as it will affect your relationships with customers.
- Inventory management: If you are holding too much stock, use just-in-time inventory systems or similar approaches to reduce the money tied up in stock.
- Improve financial forecasting: Use accurate data and analytics to forecast cash flow more effectively, helping to plan for seasonal downturns or market changes. A cash flow forecast is a vital asset for the overall management of business finances.
- Vary your product or service offering: Offer additional products or services that could boost revenue, particularly during traditionally slow periods. Finding ways to balance your offering against the ebbs and flows of the market can make your business much more sustainable in the long term.
- Streamline operations: If your overhead costs are too high, analyse workflows and processes to identify inefficiencies and areas where costs can be cut without compromising quality. You may be able to rely on technology or automation to improve processes in some areas of your business, which represents a vital opportunity in many industries.
- Debt restructuring: If debt repayment is a significant issue, consider negotiating with lenders for better terms or consolidating loans to lower interest rates. Working with the advisors at Company Insolvency Advice can help in this area, as we offer a number of vital solutions to help businesses facing debt challenges.
- Establish a cash reserve: If you do not already have a rainy day fund, this is an absolute must. Aim to set aside a percentage of your business’ income until you have enough money to cushion you against unexpected financial challenges.
- Focus on customer retention: Many businesses fail because they lose customers, and because they do not have effective procedures in place to retain them or bring them back. Focus on customer satisfaction and building relationships, and speak to unhappy customers about how you could improve and retain their business.
- Review performance metrics: Regularly review key performance indicators to identify potential cash flow problems before they become critical. Make sure that targets are set correctly so that if the business is not performing as intended, you will receive a clear warning early enough to take action.
While many businesses could benefit by following a combination of these strategies, they can also be expensive and resource-intensive to implement. Focus on the ones that will deliver the greatest impact, and ensure that you manage your cash flow effectively. From there, you can work to gradually implement further improvements and review overall business performance.
Solving a company cash flow problem
If you are facing cash flow problems and are unsure how to react or which solutions will prove most effective, it’s important to act. Delaying your action or implementing solutions ineffectively can result in serious consequences for your business.
To avoid the most dire outcomes, act quickly and seek expert support today. Contact the experts at Company Insolvency Advice to talk about your situation. We can evaluate your business’ performance, discuss the cash flow problems you are facing, and advise you on the solutions that will be most viable in your circumstances. If you act quickly, cash flow problems do not have to set your business on the road to collapse.