Business cash flow is difficult to master at the best of times, but amid rising costs, global supply chain issues and changes in consumer spending (to name a few), it's even more challenging.
Last year, 4 in 10 business owners secured finance to manage cash flow.
What's more, late payment of invoices were responsible for compounding more than half of UK SMEs' financial shortages.
Yet despite being such a common problem for small businesses, stigmas surrounding cash flow issues tend to make many feel uncomfortable discussing it openly.
The stigma only adds to the anxiety, which is why we're encouraging business owners to seek support early on and take a proactive approach to managing challenges, whatever the causes.
So let's talk about some of the main causes of cash flow problems, along with the steps you can take to stabilise and strengthen company cash reserves for long-term success.
Explore common causes of cash flow problems:
1. Late payments and extended terms
Over the years, government reforms have attempted to tackle the UK's systemic poor payment culture.
Despite this, payment issues remain one of the biggest causes of cash flow problems for sole traders, micro and small businesses.
With payment terms ranging from 14 days all the way up to 120 days, the gap between incurring expenses and receiving corresponding revenue makes it exceptionally difficult for businesses to build and sustain a healthy cash flow.
On top of lengthy terms, invoice delays and time spent following up on outstanding payments is putting even more of a strain on money, time and resources.
So much so that a survey conducted by Tide found that UK SMEs collectively spend 900,000 hours per day chasing overdue invoices.
Solutions:
Negotiate payment terms
While it's true that smaller suppliers have reduced negotiating power compared to the larger buyers they work with, it's important to remember your rights to challenge unfavourable terms and negotiate mutually agreeable payment deadlines.
Before contracting with a new business, carefully consider whether any delays in proposed terms would impact your ability to pay your own suppliers, vendors and employees.
It's easy to get swept up in the excitement of securing deals with big players, but walking away from unreasonable terms may be a better choice than risking overextending your business.
Pursue overdue invoices
In addition to putting a strain on cash flow, delayed payments create anxieties and fear of compromised business relationships, leading many to avoid chasing up late payments.
However, there are steps you can and should take to pursue money owed to your business. To ensure clear communication with debtors from the onset:
Know your rights to charge interest and compensation on outstanding amounts
Put processes in place to monitor and follow up on invoices promptly
Consider advancing payments
If late payments or extended terms are becoming a constant cause of cash flow problems in your business, invoice finance could help.
For a small percentage of the invoice value, you can substantially shorten your payment terms and receive money owed in 24 hours or less.
These days, Fintech solutions like Penny make it possible to pick which customers' invoices to advance.
This flexible model of selective invoice finance eliminates cash flow constraints and prevents business relationships from souring over payment term conflicts.
2. Cash flow management issues
Poor financial planning is another culprit of cash flow problems, and one that can quickly jeopardise a business' day to day operations.
As we learnt from the Covid-19 pandemic, uncertain times make it even more important to prioritise budgeting and ensure your small business has a cash buffer to mitigate disruptions.
It’s almost impossible to forecast finances without accurate historical data, and early mistakes with this tend to lead to underestimated costs, overspending and inefficient resource allocation.
Unlike external causes of cash flow problems, this issue is something you can quickly work to improve internally, or with the help of financial consultants.
Solutions:
Cash flow forecasting
While a cash flow forecast offers benefits in all areas of a business' finances, it's a particularly helpful tool for managing liquidity.
Used to track the movement of cash inflows and outflows during a specific period of time, these records can help to identify patterns in your company's monetary gaps, providing insights into where the biggest causes of cash flow problems are coming from.
Building cash reserves
The absence of a cash reserve can have huge consequences for a company experiencing negative cash flow.
In the UK, the highest percentage of firms with no cash reserves is found in micro-businesses, of which less than 25% have enough reserves to last more than 6 months.
As a starting point, set clear savings targets considering future objectives and necessary company spending.
Your cash flow statements can then help you carefully review:
Areas where expenses can be optimised,
Budgeting required to achieve targets,
Steps you'll take to track money saved - such as automating transfers into a separate account.
3. Seasonal fluctuations
For seasonal businesses, uneven revenue patterns and fluctuating costs can make managing cash flow all the more difficult.
From planning inventory purchases and storage expenses to maximising profit margins in peak periods, there's plenty of planning and preparation needed to combat seasonal causes of cash flow problems.
That being said, if your business experiences peaks and troughs, there are different strategies you can implement to help keep money flowing throughout the year.
Solutions:
Understand your seasonal cycle
Your cash flow forecast, together with other financial records, can help to identify patterns in busy and quiet periods, which will better enable you to plan and budget for them accordingly.
Invest in an inventory management system
Understocking can mean missed sales opportunities during your business' most important months, while overstocking risks getting lumped with leftover stock and additional storage costs.
With the help of an inventory management system, you'll be able to accurately forecast stock demands, streamline inventory-related costs and track stock levels more efficiently.
Streamline employee costs
While you'll most likely need additional staff to cover busier months, quieter periods provide an opportunity to reflect on ways to improve your hiring process and reduce associated costs.
Diversify revenue streams
Exploring additional products or services to offer out of season can be a smart way to achieve more consistent cash flow and avoid over-relying on season-specific revenue.
Think about different ways to expand your target market, grow your customer base and take advantage of opportunities that supplement your existing offering.
Ensure timely payments
Make use of solutions designed to help mitigate the unpredictable aspects that come with running a seasonal business.
For instance, cash flow funding can be used to gain greater control over your customers' payments, offering fast access to accounts receivable, reducing anxieties that come with delayed payments.
4. Problems with pricing strategies
Getting your pricing strategy right can make all the difference in lowering your cash conversion cycle (CCC) and preventing poor cash flow.
For B2B businesses, the buying process can be especially complicated, and the sales cycle is typically longer than it is for companies selling directly to customers.
As one example, high-value sales transactions sold in low volumes provide the opportunity to increase profit margins. However, they also bring challenges like extending the length of a business' sales cycles.
Heavy reliance on accounts like these risk large amounts of money being outstanding simultaneously, which means delays from even one or two accounts could seriously affect cash flow.
The more thought you put into successfully pricing products/services, and the margins these pricing strategies produce is essential to maximising your company's liquidity.
Solutions
Tiered pricing
To avoid over-reliance on one pricing model, consider implementing a tiered pricing structure that diversifies your customer base and offers varying products/services features that capture a broader range of budgets.
Offering greater flexibility in price points can also work to improve customer retention, increasing loyalty and driving more consistent revenue over the long term.
Long term contracts
Aside from generating more predictable revenue and aiding cash flow forecasting, securing lengthy contracts can benefit payment terms and help you negotiate things like minimum volume commitments and partial upfront payments.
Offering incentives, such as slightly discounted rates, personalised account management support and value-added services, can make all the difference in generating a steady flow of cash.
Minimum order requirements
To ensure each transaction meets a threshold of profitability, consider implementing minimum order quantities (MOQs).
Doing so can help to improve your company's cash flow management in all areas - from lower ordering process costs to improved inventory levels, streamlined shipping and logistics efficiency.
Get help with causes of cash flow problems in your business
Navigating the world of business finance is tough, but Penny can help. If you'd like to find out more about how our cash flow finance solution can support your business, get in touch with the team.
Let's talk.
02392 894000
hello@pennyfreedom.co.uk
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