Cash Flow Problems and How to Fix Them

By Ram - Nov 30 2023

Cash flow problems occur when the business doesn’t have enough money coming in to cover the money going out for daily operations. In simpler terms, the business can’t pay its bills on time because it lacks enough cash at hand.

Cash flow problems can sometimes start small, but if not quickly managed, they can spiral out of control. For instance, late invoice payment can set off a chain reaction where you fail to pay suppliers and staff, and consequently, suppliers stop providing goods, and employees leave, making it even harder to earn money.

Businesses suffer from cash flow problems for various reasons. Depending on the reason, there are ways the business can fix the problem to improve cash flow and restore balance.

Common Cash Flow Problems that Businesses Experience and Solutions

Late payments

Late payments are one of the leading causes of cash flow problems for small businesses. Small business owners typically operate with tight budgets and rely on timely customer payments to pay bills and scale.

Unfortunately, when many clients pay late, some taking over the standard 30 days to pay what they owe, the business starts struggling. The longer the business has to wait for the payment, the more financial danger it faces, especially when you rely on cash for growth.

You might end up spending time and money to get assistance with non-paying customers, which further compromises the business’s financial health.

Solution

One of the best ways to address late payments is to get up to speed on the best billing practices. Using an online, cloud-based online invoicing software for all your billing needs is a good start. Many online payment solutions provide invoicing tools to help customers pay you on time.

Also, businesses can access multiple payment forms, follow up with clients and easily access your invoice records and reports.

You can also offer early payment discounts to encourage faster payments from clients.

You can also look into invoice financing products that allow you to use your outstanding sales invoices as collateral for financing.

With invoice financing, you can access up to 80% of the value of the invoice upfront and the remaining 20% once the client pays the invoice in full. This can be a great way to maintain cash flow without rushing your clients.

Lack of profitability

Lack of profit is another common reason businesses struggle with cash flow and eventually fail. There is a correlation between poor profitability and cash flow problems, but financial issues can also arise for businesses that are making a steady profit.

If your company has high overheads and you’re looking to reinvest profits, you must be extra careful about emerging cash flow issues. Many companies have gone under despite raising millions in profit because they could not generate steady cash.

Solution

The best way to address profitability is to look for more profit-making opportunities that increase cash flow.

You can try developing new products or services, implementing product markups, doing consulting work and offering discounts and deals to increase traffic to your business.

Withheld funds or investments

One of the methods companies use to get capital is through loans. Although this is a favourable channel, it has severe contingencies that could risk the business’s future. For example, banks can withhold funds if you don’t meet their income expectations, which can cause cashflow issues if you rely on those funds to cover major expenses such as replacing machinery or responding to an emergency situation.

Solution

The best way to avoid getting assets and finances getting tangled up in loans is to carefully consider your funding options and ensure you pick the ones that give you a lot of breathing room. Also, when seeking a loan or an investment, always ask for 25 per cent more than the projected amount as a line of credit. This way, you have extra cash available to cover any unforeseen emergencies.

You should also prepare a cash flow statement including your bank deposits, short-term investments and other assets to help determine your business’s financial health.

Not enough cash reserves

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

Many businesses don’t have additional cash reserves to fall back on. Any sudden increase in operating expenses could throw the business in disarray without anything to fall back on.

The solution

One of the ways to fix cash reserve problems is through predictive forecasting. Creating a cash flow forecast can help you anticipate your monthly cash flow. This lets you see how much money you need to cover expenses over a period.

If you find saving a substantial cash reserve unrealistic, you should look at potential lending options you can access when needed, such as selective invoice financing.

Excessive borrowing

Businesses have a wide range of borrowing options, which can easily get them into trouble if they practice excessive borrowing. Most of these borrowing options have high interest rates and require monthly principals, which can build up so much that they affect your cash flow and prevent you from paying other business expenses.

Solutions

Businesses will seek financing at some point. However, choosing the right time and type of financing for your needs is vital to avoid borrowing more than necessary.

If debts are causing cash flow issues, you can look into refinancing current high-interest debt. One consideration is going for a secured business loan as a way to consolidate existing debt. If you have a high-interest overdraft or a credit card debt, a business loan can help you reduce monthly payments and interest fees.

Going forward, the business should carefully assess its loan repayment obligations to avoid taking more than it can comfortably repay.

Decreasing sales

Shrinking sales volumes can also affect a business’s cash flow situation. It could be due to seasonal fluctuations, external economic conditions or other factors. Regardless, if you make fewer sales, you will see cash flow reduce as less money flows into the business.

Solution

Marketing is the primary solution to getting your products and services in front of the right prospects. The average marketing budget should be 9.5% of the total company revenue, but this differs depending on the industry and the business size.

Communicating any sales volume goals with your marketing team is also important. Make sure they know the products you want to focus on so they can create relevant campaigns and promotional material that supports your sales goals.

For extremely seasonal businesses, diversifying and adding a product that supports the business during low season can also help to address the cash flow issues.

Excessive inventory

Having too much inventory isn’t always a good thing. Some businesses have a good reason for doing this, like avoiding imminent price fluctuations, but overinvesting in inventory means you tie up capital and reduce liquidity. You also risk getting stuck with products you’re unable to sell.

There are several causes for excess inventory, including supply chain management, cancelled orders and inaccurate projections.

Solutions

If you struggle with inventory, an inventory management system should be your first attempt at fixing the problem. It will help you balance inventory and predict how much you should order ahead of time. The system can also help you avoid understocking and leaving customers disappointed.

Uncontrolled growth

A growing business is cash-hungry. As your business grows, so do the expenses. You need to be able to cover your overheads and fund new orders, which requires investment. If you can’t raise enough capital, you risk losing out on opportunities and turning away potential customers.

If you invest too much, you might stretch your working capital and aggravate your cash flow problems. A careful balance should allow you to address emerging challenges without creating new ones.

Solution

As the business grows, access to financing is key to sustainable business growth. Debtor finance is one of the ways you can ensure you keep up with your cash flow demands by leveraging sales instead of taking up more debt. You can also use your account receivables to secure a flexible line of credit.

Unlike an overdraft or a bank loan, the credit limits increase with sales revenue, meaning you grow as you make more sales and you have access to more funding.

Closing Remarks

Cash flow is a juggernaut that looks easy to solve on the surface but is elusive in practice. Many businesses have found themselves in the same pit despite planning and trying to avoid finding themselves in a similar situation.

Identifying the driving factor behind your cash flow issues should be the first priority because after that, you can come up with effective ways to handle the situation. You should be able to right the ship with some consistency and a change in habit.

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