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12 common causes of cash flow problems (and how to overcome them)

14/09/2017 / Comments 0

Common causes of cash flow problems

All successful business owners know that cash is king, yet cash flow problems of any kind continue to pose some of the biggest obstacles for businesses to overcome.

Most companies will encounter a cash flow problem at some stage in their business life.

Whilst this can have serious consequences, most of these challenges can be prevented with a bit of preparation and the right strategy.

To help you get to the root of your challenges and keep your business thriving, here is a list of some common causes of cash flow problems, along with ways to solve them.

1. Seasonal imbalances

The majority of businesses experience seasonal highs and lows throughout the year. But, without the right planning, these seasonal imbalances can cause businesses to feel the financial impact.

When a business experiences a busy period, some may find it hard to meet the increased demand. Whilst in the quieter periods, it can be difficult to meet day-to-day running costs.

To keep your cash flowing all year round it is first essential to get to know your seasonal cycle. Over time your financial records will highlight trends which can steer your business decisions.

When you expect to have a seasonal peak you may want to employ more team members or bring in extra stock. Whereas, when you expect to have a down period you may want to try additional marketing techniques or find a new product to fill in the gap.

Unfortunately, not all seasonal imbalances can be planned for. A surprising change in weather, for instance, can cause an unexpected cash flow gap. For example, a business that sells sunglasses and swimwear may struggle to make a sale when the country experiences a cold snap.

This is why having cash reserves or a flexible finance facility in place is essential. See how we helped this wholesaler find a funder that was willing to see past their seasonal variations and provide the funding to allow them to move their business forward. 

2. Declining sales

Whether it’s due to deteriorating economic conditions, an increase in competition or a slowdown in your industry, even a small drop in sales can cause significant cash flow problems.

To minimise the impact this has on your business you could: encourage customers to upgrade to higher value products or services, add on complementary items to boost your average sale price, or encourage customer loyalty so they stay with you for longer.

3. Flawed business model

Some businesses naturally have a negative cash flow business model, for example, businesses which trade on credit terms and have to pay suppliers before receiving payment or importers who pay for goods before they arrive in their warehouse.

Fortunately, there are finance options which allow businesses to bridge this cash flow gap and make payments ahead of being paid by their customers.

For example, invoice finance releases up to 90% of an invoice’s value within 24 hours of its issue, providing the capital that’s required to pay suppliers and meet day-to-day commitments. The remainder is then passed across once payment is received from the customer, less the invoice finance company’s fees.

4. Excess stock

Whilst buying in bulk can have advantages, if you purchase too much stock it could end up gathering dust and tying up cash.

This is why good stock management is essential so that you never hold stock for longer than necessary.

To achieve this you should implement a good stock management system, monitor inventory levels carefully, discipline your spending habits and always clear discontinued or obsolete stock.

If your business has a large amount of cash tied up in the value of excess stock, it is possible to release this working capital through stock finance.

Commonly provided as part of a wider asset based lending facility, stock finance enables businesses to release capital against raw materials, work in progress or finished goods.

5. Undisciplined spending

It doesn’t take a genius to work out that if you spend too much it will put a strain on your cash flow. Whether it’s because you don’t have the time or resources to shop around so you overspend or because you purchase things your business doesn’t need, you must discipline your spending or your cash flow will suffer.

The first step to overcoming this issue is to analyse your expenditure so that you have a clear picture of your incomings and outgoings. This will highlight where all your money is going and where you can make cutbacks. Look at each outgoing and ask yourself two things: do I need this to be successful, and do the ends justify the means?

In the future write down everything that you would like to purchase and the costs involved. You can then prioritise these expenses in order of which will have the greatest positive impact on your business. This will ensure that your money is being spent in the best way possible and that you don’t overspend on unnecessary items.

6. A restrictive funding facility

Many businesses find a funding facility and then stick with it – even when their needs have changed and that facility may not be working optimally anymore.

Whilst on the surface just having a source of external funding may seem good enough, relying on a facility that doesn’t fit your needs could be doing more harm than good.  

For example, growing or seasonal businesses that have a static finance facility may require something more flexible to allow them to easily adapt to changes in demand.

Also, some businesses require more than just a cash flow boost from their funder and could benefit from a facility which incorporates additional services and benefits such as credit management or debtor protection.

If you are dissatisfied with any aspect of your current funding arrangement, it could be beneficial to benchmark the funding options available to see if there is a better fit for your business. This could allow you to capitalise on new business opportunities and manage cash flow more effectively.

7. Overtrading

Whilst sudden or rapid growth may sound like good news, it could be putting pressure on your cash flow.

If you don’t have the resource or the right infrastructure in place, taking on too many orders too quickly can be more damaging to your cash flow than not taking any on at all.

Fortunately, there are various funding options available which could inject funding into your business to support its growth.

This is another area where invoice finance can be particularly beneficial, releasing up to 90% of an invoice’s value within just 24 hours of its issue to bridge the cash flow gap between providing a service and getting paid.

Its flexible nature means that the amount businesses can access grows in line with turnover. So, the more invoices you raise, the more funding you will receive.

8. Poor financial planning

One of the most unnecessary causes of cash flow shortages is poor financial planning.

Failure to forecast, plan and budget effectively often means that cash flow shortages occur when they could have been avoided.

Effective financial planning will ensure that you spot cash flow shortages before they occur and allow you to take the necessary steps to improve your financial position before it becomes an issue.

It could even help you to identify if additional funding is required and help you to secure it.

For tips on how to forecast, plan and budget effectively, download this handy guide

9. Late payment

When a customer misses a payment deadline it can put significant strain on cash flow. Without money coming in on time you may not be able to meet your own commitments such as paying suppliers or employees.

As soon as you realise that a customer is going to exceed credit terms you should update your cash flow forecasts to highlight any impending cash flow gaps. This will allow you to take appropriate action to ensure you don’t end up struggling financially.

You could negotiate an extension with your suppliers, offer another customer an early-settlement discount or approach the bank to extend your funding.

Going forward it could be wise to improve your credit control processes to reduce the chances of late payment occurring at all. There are a number of credit management techniques you can try to encourage your customers to pay on time and protect your cash flow.

Our sister company, Hilton-Baird Collection Services, shares lots of tips and resources on improving your credit control. Take a look at their blog here.

An alternative option would be to consider invoice factoring which, in addition to releasing up to 90% of the value of an invoice within 24 hours, provides a dedicated sales ledger management service to improve results and remove the burden from your business.

10. Bad debt

If late payment causes a cash flow headache, then bad debt – where the customer doesn’t pay at all – can be a nightmare. Unfortunately, this is all too common for businesses trading on credit terms and can pose a significant risk to your cash flow.

Statistically, as a debt grows older the chances of getting your money back significantly reduce. And the more time and resource you commit to chasing these debts, the more it ends up costing your business. Therefore, it is essential that you act as soon as possible to prevent your cash flow suffering. 

If you have debts that are proving difficult to collect, it could be beneficial to outsource them to a specialist debt collection agency.  These companies excel at encouraging customers to pay and will remove the burden from your business.

In the future, you can reduce the chances of suffering from late payment and bad debt by always performing a credit check of your customers before offering credit terms. The information revealed in a credit report will allow you to make an informed decision about what credit terms to offer or if full or partial payment should be requested up front.

11. Low gross profit margins

Many businesses set their prices when starting out and then only make nominal increases every few years. But this could mean that gross profit margins are low, and sometimes even negative, making it extremely difficult for the business to maintain a healthy cash flow.

Whether it’s a result of high direct costs, not charging enough or competitive industry pressures, it’s essential that you regularly look at your gross profit margin to ensure that your pricing is optimal for success.

To do this you should audit all of your products and services to determine the all-inclusive cost of delivery. Once you have this figure you can either raise the prices of products with weak margins or consider dropping them completely.

Whilst it can be daunting raising prices for loyal customers, if you fail to do so you could find that they are costing your business more than it’s making.

12. High overhead expenses

If your business’s overhead expenses, such as rent, telephone bills and utilities, are too high in relation to your sales volume it could lead to a cash flow shortage.

Having bills fall due around the same time of the month or year can also leave businesses short and scratching their heads over how to pay on time.

The easiest way to reduce the impact this has on your cash flow is to regularly audit your expenses and cut back where you can. With many suppliers it’s also possible to change the timing or frequency that bills fall due to make them more manageable, for instance by switching to monthly rather than quarterly billing cycles.

When making cost-cutting decisions, remember that sometimes the cheapest option isn’t necessarily the best. You need to be careful not to sacrifice quality for cost as this could have a negative impact on your company.

Particularly as a business grows it can be easy to lose track of expenses, but failing to monitor your outgoings could leave you short.

This blog post looks at five key areas to save your business money

Sound familiar?

If your business is experiencing any of the issues mentioned above you need to address them urgently. If you fail to do so your cash flow problems can escalate and threaten your ability to stay in business.

Always remember that it’s important to deal with the root cause of your cash flow problems as a quick fix may end up doing more harm than good.

As a leading commercial finance broker we can help you find the most suitable solution for your cash flow needs. Contact us today on 0800 9774833 or email info@hiltonbaird.co.uk to see what we could do for your business.

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Funders we work with

  • IGF Invoice Finance
  • Close Brothers Invoice Finance
  • Aldermore Invoice Finance
  • Pulse Cashflow Finance
  • ABN AMRO Commercial Finance
  • Davenham Trade Finance
  • Ultimate Finance Group
  • Skipton Business Finance
  • Calverton Finance
  • Nucleus Commercial Finance
  • Partnership Invoice Finance
  • Trade Finance Partners
  • Metro Bank SME Finance
  • Assetz Capital
  • PNC Business Credit
  • Shawbrook Business Credit
  • Santander Corporate & Commercial
  • Leumi ABL
  • Factor 21
  • Team Factors
  • Amicus Commercial Finance
  • Ashley Commercial Finance
  • Positive Cashflow Finance
  • Invoice Cycle
  • iwoca
  • Everline
  • GapCap Cashflow Finance
  • Henry Howard Cashflow Finance
  • Secure Trust Bank
  • Innovation Finance
  • Barclays
  • Lloyds Bank Commercial Finance
  • Davenham Asset Finance
  • Asset Advantage
  • Working Capital Partners
  • Creative Capital
  • Market Invoice
  • Catalyst Finance
  • Woodsford Tradebridge
  • Roma Finance
  • Platform Black
  • Hitachi Capital Invoice Finance
  • Royal Bank of Scotland
  • Outsauce
  • 1pm
  • Bibby Financial Services
  • Regency Factors

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