Cash flow problems: What are they and how to fix them (2024)

Cash flow problems happen when a business doesn’t have enough money to pay for its day-to-day running costs.

We explain how cash flow problems often arise, how to fix cash flow issues and how we can help.

What is a Cash Flow Problem?

Cash flow problems happen when a business doesn’t have enough money coming in to cover the money going out for daily operations. Simply put, you can’t pay your bills on time because there’s not enough cash at hand.

These problems can start small but can grow quickly if not managed. For instance, if clients are late paying their invoices, you may find it hard to pay your suppliers or staff. This can set off a chain reaction: suppliers may stop providing goods, and employees may leave if they’re not paid, making it even harder to earn money and get back on track.

Various reasons can cause cash flow problems. Slow sales periods, too much stock that isn’t selling, high overhead costs, or unexpected expenses like repairs can all put a strain on your cash flow. It can happen in any industry and to companies of all sizes.

When you’re facing cash flow issues, it becomes difficult to invest in new opportunities or even maintain day-to-day activities. This makes it essential to understand the problem in-depth and take immediate action

8 Cash Flow Problems that Could Cause a Business to Fail

Cash flow problems can occur in any business, regardless of size or industry. Here are some common signs that your business may be experiencing cash flow problems:

• Difficulty paying bills on time:This is one of the most obvious signs of cash flow problems. If you’re constantly struggling to pay your bills on time, it means that you don’t have enough cash coming in to cover your outgoing expenses.
• Negative cash flow:A negative cash flow statement means that your business is spending more money than it’s bringing in. This can be a sign of short-term or long-term cash flow problems.
• Delays in receiving payments from customers:If your customers are late paying their invoices, it can tie up your cash flow and make it difficult to pay your own bills.
• Overreliance on a small number of customers:If your business relies on a small number of large customers, you’re more vulnerable to cash flow problems if one of those customers stops paying you on time or reduces the amount of business they give you.
• Holding too much inventory:If you’re holding too much inventory, it can tie up your cash flow and make it difficult to cover other expenses.
• Low-profit margins:Low-profit margins can make it difficult to generate enough cash flow to cover your expenses.
• Growing too quickly:If your business is growing too quickly, it can put a strain on your cash flow, especially if you need to invest in new inventory, equipment, or staff.
• Unexpected expenses:Unexpected expenses, such as a major repair or a customer refund, can also cause cash flow problems.

If you’re experiencing any of these signs, it’s important to take action to address your cash flow problems as soon as possible. Otherwise, they could lead to more serious problems, such as bankruptcy.

What is the impact of cash flow problems?

Continuous poor cash flow leads to a breakdown in the smooth running of the business, including problems paying suppliers, the inability to pay employees, and creditor pressure. We’ll explain more below:

Here are some of the key impacts of cash flow problems:

• Inability to pay debts:Cash flow problems can make it difficult for a business to pay its bills, loans, or other financial obligations on time. This can lead to late fees, interest charges, and damage to the business’s credit rating.
• Disrupted operations:Cash flow problems can disrupt a business’s operations, making it difficult to maintain inventory levels, pay employees, and invest in new opportunities.
• Reduced profitability:Cash flow problems can reduce a business’s profitability by increasing its costs and reducing its revenue.
• Loss of customer confidence:Cash flow problems can lead to a loss of customer confidence, as customers may become concerned about the business’s ability to deliver on its promises.
• Increased risk of failure:In severe cases, cash flow problems can lead to business failure.

It is important to note that the impact of cash flow problems can vary depending on the severity of the problem and the specific business in question. However, even minor cash flow problems can have a negative impact on a business over time.

6 Ways to Solve Company Cash Flow Problems

1. Access a flexible line of credit

Finding a flexible line of credit that gives your business quick access to funds as and when they’re required could be a simple way to ride out a cashflow storm.

Short-term business loans, company credit cards, overdraft facilities and invoice finance can all provide quick access to cash. The key is to find the source of finance that’s the right fit for your business and ensure you can easily afford the interest charges now and in the future so you don’t put further strain on your cash.

You may find that an ongoing line of credit, such as an overdraft facility or invoice factoring, is a better option than a short-term loan if you don’t need to access a large amount of cash right away. It can then be used as a cash cushion as and when it’s needed.

2. Audit your Finances

If you’re experiencing cash flow difficulties regularly, you need to take a long hard look at your business’s finances.

This should be planned carefully. If you are going to reduce the outgoings, you must distinguish between the costs essential to the business and those not.

For example, putting a cap on employee overtime might reduce the costs of the business, but how would it impact income? Similarly, moving to a cheaper location might reduce the money you spend on rent, but would the loss of prestige/footfall damage your business?

Similarly, there may be simple improvements you can make to increase your income. Introducing a complementary product line or service may be an easy way to boost your revenues, but what additional costs will that create?

3. Create Cash Flow Forecasts

There’s no better way to solve a cash flow problem than to prevent a shortfall in the first place.

Creating and using cash flow statements regularly will let you know how much cash reserve the business will need in the coming months. If a seasonal dip in sales or a one-off requirement for cash is expected in the months ahead, you can take the necessary precautions now, such as organising a line of credit, so there’s no negative impact on your business.

Cashflow forecasts are a simple but underused accounting tool that can help company directors avoid trouble. However, they must be updated regularly with the actual figures rather than those forecast to increase their accuracy in the future and create a tool you can rely on.

4. Negotiate Favourable Credit Terms with your Suppliers

Another step you could take is to negotiate improved payment terms with your trade partners or suppliers.

If your customers pay you within 60 days of a product or service being delivered, but you pay your suppliers within 30 days, you’ll have a period of 30 days where you’ve paid more money out than you’ve recouped. If not planned for, that can easily create a cashflow shortfall.

If you have a good payment history with your suppliers, they may be open to extending your payment terms. That would allow you to hold onto the cash for longer and reduce the risk that you’ll be left out of pocket. Most suppliers would prefer to provide improved payment terms rather than lose you as a customer.

5. Prioritise Credit Control

Late payments from customers and bad debts (when payments aren’t made at all) can hugely damage a business’s cash flow.

In fact, if you rely on just a small number of customers, a single unpaid invoice could be enough to make your business insolvent . That’s why you should take the time to check the creditworthiness of prospective customers before you agree to work with them.

You can take simple steps to use a third-party credit checking service, invest in credit risk software, and ask for trade references.

You should also formalise the process of chasing late payments and making sure your debtor book is up to date. Taking steps such as charging interest on late payments and offering discounts for early payments can help to increase the likelihood that payments will be made on time.

5. Invoice Quickly and Accurately

Some of the common causes of cashflow problems are out of the hands of your business. Yes, you can reduce the risks, but if a customer decides they aren’t going to pay, your only option is to take legal action, which will take time and leave you out of pocket in the meantime. However, sending out invoices quickly and accurately is one part of the process you have complete control over.

6. Free up Assets

Is your business asset-rich but cash-poor? In that case, looking critically at some of the assets your business owns and selling those that aren’t absolutely essential to running your business could be an easy, although not necessarily quick, way of increasing your working capital. If you’d prefer not to sell a business asset, leasing it out could bring in additional income while allowing you to retain ownership.

If you’re experiencing regular cashflow problems that are making it difficult to make payments when they’re due, your business could be on the brink of insolvency. In this case, immediate professional assistance from a licensed insolvency practitioner is advised before it’s too late. Once your business is insolvent, you must legally prioritise the interests of your creditors, which completely alters your freedom to take action.

Need Help?

Then get in touch with our team of turnaround practitioners today. We will provide a free, no-obligation consultation to help you solve your company’s cash flow problems.

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