Solutions to cash flow problems (tackle the 9 biggest causes)

23/01/2020

All good business owners know that cash is king. And, unless you’re one of the lucky ones, at some point in your business life you will encounter a cash flow problem.

Fortunately for SMEs, almost all cash flow problems have a solution. You just need to find the right option for your business’s needs.

Here we look at nine common cash flow problems and the ways your business can overcome them.

1. I’m spending too much money

Keen to capitalise on every opportunity that arises, it can be tempting to purchase things you don’t necessarily need. Or maybe you overspend because you don’t have the time or resource available to shop around. But if your cash flow is limited, spending too much could be putting unnecessary strain on your cash flow.

Solution

To successfully maintain a healthy cash flow you need to have a clear picture of all your incomings and outgoings. Analyse your expenditure to see where you money is going and make cutbacks where possible. Look at each outgoing and ask yourself if you really need it in order to be successful? And, do the ends justify the means? This can help you decide which things can be cut and which ones are fundamental to your business’s success.

Also, benchmarking your existing suppliers could help reduce your spending. But whilst saving money is good, be careful not to sacrifice quality just for a cheaper deal as this could have a negative impact on your business.

Going forward, keep a list of all the new things you’d like to try and the potential costs involved then prioritise in order of which will have the greatest positive impact on your business. This way you can make sure your money is being spent in the best way possible.

2. I can’t afford to pay my bills

When businesses are struggling with cash flow, supplier payments are often delayed in an attempt to preserve the company’s own position. However, not paying bills or suppliers on time can be expensive as interest piles up on the already outstanding payment sending businesses further into debt. Additionally, suppliers may be less inclined to extend credit or do business going forward which can have a detrimental effect.

Solution

First, don’t be tempted to ignore your cash flow issues and simply hope they go away. Your cash flow is the most important aspect of your business and should not be neglected. The sooner you work on cash flow issues, the less daunting and time consuming the task will be. So, tackle your problems head on at the earliest opportunity.

If you have strong relationships with your suppliers, it could be beneficial to pick up the phone and request a small payment extension or agree a payment plan. Many businesses are afraid to ask for help, but there’s no harm in asking. And, often your suppliers will be more appreciative of being kept in the loop, particularly if the alternative is for you to extend payment beyond agreed payment deadlines.

If the cash flow gap is being caused by your own customers taking too long to pay, it could be worth reviewing your credit control processes or terms and conditions to see if improvements could be made to get payments in more quickly. Alternatively, cash flow finance solutions which release funding against your invoices could be worth exploring.

3. My business is growing too fast

Increased demand for your products and services may sound like good news but, if your business doesn’t have the resource to fulfil all the new orders, the impact on your cash flow could be problematic. In fact, without the right infrastructure in place, taking on too many orders, too quickly, can be more damaging than not taking any on at all.

Solution

With the finance market constantly evolving and changing there are so many ways you can inject funding into your business to support growth. Whilst traditionally most businesses turned to their bank for a loan this is no longer the first – or even most suitable – option for businesses.

Invoice finance is tailor-made for growing businesses and can help overcome the issues associated with trading on credit. By releasing up to 90% of an invoice’s value within just 24 hours of its issue, it effectively funds the cash flow gap between providing a service and getting paid, ensuring a healthy cash flow is maintained and suppliers, staff, utility companies and mortgage providers can all be paid. Also, 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.

Here we look at 10 ways you can fund your business growth without having to take out a bank loan.

4. I need to purchase new machinery

As a business grows, additional plant, machinery and equipment may be needed in order to sufficiently meet increased demand, whilst others will look to replace dated machinery with newer versions that are more efficient to give the company a competitive edge. Buying this equipment outright can take a large sum of funds away from your business and put strain on your cash flow.

Solution

Asset finance allows businesses to purchase new plant, machinery and equipment whilst protecting their cash flow. Hire purchase allows your business to hire an asset from a leasing company over a fixed period of time in return for regular payments. The hire purchase company purchases it on your behalf and, once the repayment period of the hire contract is over, your company will have full ownership of the asset.

Alternatively, finance leases and operating leases allow businesses to use an asset for a fixed period in return for regular payments. You will not own the asset outright at the end of the repayment period, although an extended lease could be negotiated if needed.

5. I need funds to fulfil a large order

Receiving a large order is an exciting time for any business, but without adequate resources in place to deal with the order it can pose significant challenges to your cash flow. Particularly when trading on credit terms, satisfying the order before getting paid can put a severe dent in your cash flow.

Solution

While traditional invoice finance provides funding against a business’s entire sales ledger, single invoice finance, also known as spot factoring, allows you to release cash from individual invoices as and when you need to. This is particularly beneficial for businesses who only want to release funds against high-value invoices, or those with long payment terms, that they would not necessarily have the ability to fulfil without access to funds.

6. My customers are slow paying their invoices

Not only is late payment frustrating, it can also be highly damaging to a business’s cash flow and success. Without money coming in on time, your business’ cash flow can be severely affected and the associated problems can quickly get out of hand. According to Pay.UK, SME late payment debt rose to £23.4 billion in 2019. Despite government efforts, many businesses are predicting that late payment will continue to get worse in 2020, and the effect on businesses could be catastrophic. 

Solution

First, it could be beneficial to improve your credit control processes. There are a number of credit management techniques you can try to encourage your customers to pay on time. Unfortunately, not all businesses have the time or resource to dedicate to effective credit control. If this is the case for your business you could outsource the task to the experts who will use their extensive experience to deliver the best results for your business.

Also, factoring enables businesses of all sizes to overcome the cash flow challenges posed by trading on credit by advancing up to 90% of an invoice’s value to you within 24 hours of its issue. As well as bridging the cash flow gap, factoring provides a dedicated sales ledger management service, leaving you the time and resource to meet your day-to-day cash flow commitments without worrying about your money coming in on time.

7. I have excess stock tying up cash flow

Buying in bulk has its advantages and can be a sensible option for many businesses. However, problems with this approach may arise if order levels reduce. In these circumstances, you may find that you have lots of stock sat in a warehouse gathering dust and restricting your cash flow.

Solution

If you need a cash flow boost, it may be beneficial to use your stock to leverage funding. Stock finance releases capital against inventory that would otherwise be tied up as raw materials, work in progress or finished goods. It can be provided as part of a wider asset based lending facility that incorporates funding against other assets also.

Also, in the future weigh up the pros and cons of buying in bulk. Do the savings outweigh the costs of storage? And are your products losing value? Depending on the nature of your business, it could be beneficial adopting a ‘Just-In-Time’ buying policy to help manage cash flow.

8. Late payment and bad debts are placing a strain on my business

Unfortunately when trading on credit, late payment and bad debt are a huge risk to your cash flow. And, statistically, as a debt gets older it becomes more difficult to collect. So, if you have lots of debts that remain outstanding after 90 days, not only will it be restricting your cash flow, chasing payment could be consuming a great deal of your business’s time and resource too, costing your business even more money.

Solution

When faced with this situation, it could be beneficial to outsource these debts to a specialist debt collection agency, who’ll not only remove the burden from your business but also bring their expertise to the process. Often the added weight of third party intervention can be all that’s needed to encourage a customer to pay.

To reduce the likelihood of late payment or bad debts going forward, credit check both new and existing customers to assess the risk they pose to your cash flow. The information gained from credit reports can help you decide the length of the terms to offer, and even if full or partial payment should be requested up front.

9. My credit score is stopping me accessing funding

When banks consider lending, your credit score and how big a risk they believe your business to be are important. And, unfortunately, a bad credit rating can prevent your business from accessing certain forms of funding, which could be holding your business back.

Solution

Firstly, you could try to improve your credit rating by clearing any debt and making a conscious effort to pay bills and invoices on time. It’s also important to correct any mistakes, even something as little as an incorrect address can affect your credit history.

Also, not all funding providers focus on credit scores. Factoring is secured on your debtors and the quality of the outstanding invoices, as well as a sound business plan.

Whatever your cash flow problems, at Hilton-Baird Financial Solutions we will try our best to help and find the most suitable solution for your needs. Contact our team today on 0800 9774833 or email info@hiltonbaird.co.uk to see what we could do for your business.