Learn more about some of the most common cash flow problems for businesses and the steps you can take to resolve them.
Effective cash flow management is an essential part of running a small business. If your business has positive cash flow, it means you have more money coming into your business than going out, making it easier to pay expenses such as rent and bills on time.
But if your cash flow is negative, you have more money going out of your business than coming in. This can make it harder to meet financial obligations, and your business could struggle to survive.
For this reason, it’s important to understand the cash flow difficulties your business might face and the steps you can take to overcome them.
A business can look profitable on paper but still run into cash flow difficulties from time to time. Below is a list of some of the most common cash flow problems and what you can do to resolve them.
Slow and late payments are one of the biggest causes of cash flow problems. After all, if your customers are late paying their invoices, this can make it harder for you to meet your own financial obligations and expenses.
How to overcome it: It’s crucial to make your payment terms clear at the start of a new contract. You could also use accounting software and invoicing tools that chase late payments on your behalf, so you don’t need to deal with it. Some apps will take electronic payments, too, making it easier for your customers to pay.
To encourage prompt payments, consider rewarding customers who pay early – perhaps by offering a discount. To take things even further, you could start charging penalty fees for late payments. But if you do this, you must make the fees clear when you draw up the initial client contract and again when you issue the invoice.
Having too much inventory ties up your cash and can negatively impact your cash flow. It can also prevent you from restocking with products that might sell faster and increase your sales.
How to overcome it: Carry out regular inventory checks and make a list of any items that aren’t selling well. Instead of buying more of these products, it’s best to sell them off fast, even if this means lowering the price. This helps boost your cash reserves and gives you room to stock up on products that are more likely to sell at higher prices.
You can also use inventory management software and forecasting tools to help you assess what you should produce and sell.
If your business has relied heavily on credit, such as business loans or credit cards, and you’re now struggling to meet the repayments, this can have a negative impact on your cash flow. The more you’ve borrowed, the harder this can be.
How to overcome it: The key is to get your debt repayments under control. To do this, consider consolidating your debt so that you only have one loan to repay at a lower rate of interest. This can make your repayments more manageable and improve cash flow.
It’s also crucial to speak to your lender as soon as possible if you’re struggling with debt repayments, as it may be able to come up with an alternative repayment plan for you.
If you don’t keep on top of your business finances, it can be impossible to know how much cash you have coming into the business, and how much is going out. As a result, you won’t be able to predict when you might face a cash flow shortage or take steps to help mitigate this.
How to overcome it: Keep accurate records of your cash inflows and outflows and update accounting information regularly.
You should create a weekly or monthly cash flow forecast to cover the next three months or even longer. This will allow you to anticipate periods of tight cash flow and potential payment challenges, giving you time to explore ways to free up cash, such as cutting overhead costs or securing new investment.
Building a cash reserve can be challenging for a new business, but without one, covering unexpected costs may put your cash flow at risk.
How to overcome it: Building a cash reserve gives you a financial cushion to manage unexpected expenses and events. Start by setting aside a small percentage of monthly revenue and increase this over time. You may need to get better at budgeting, cutting costs and allocating funding to achieve this.
High costs for rent, utilities, and other expenses can put a strain on your cash flow. While investing in your business is necessary, it’s important to regularly review your expenses to identify potential savings.
How to overcome it: Review your cash flow analysis to pinpoint where your money is going. Look for cost-saving opportunities that won’t compromise your company’s values or core operations. For example, you might move to a more affordable location or switch to a supplier with lower prices while maintaining product quality.
If your business uses tired and old equipment, you could end up forking out a lot of money for repairs and replacements, which can have a big impact on cash flow.
How to overcome it: Instead of buying equipment outright, consider leasing it. This allows you to pay a smaller, fixed monthly fee, preserving your cash reserves. Leasing also ensures you have access to the latest equipment, helping to improve efficiency and streamline production.
Rachel has spent the majority of her career writing about personal finance for leading price comparison sites and the national press, including for the Mail on Sunday, The Observer, The Spectator, the Evening Standard, Forbes UK and The Sun.