The majority of business owners are well aware of the damage poor cash flow can cause. More alarmingly, 68% of small businesses now say they’re living through those cash flow problems.
From late payments, to unwanted loans, and strained supplier relationships, the consequences of poor cash flow are widely known. On the other hand, the warning signs and causes are often overlooked.
In this blog, we here at Dext will be sharing why cash flow problems may occur and what you can do to get yours back to positive. But first, let’s start with a few definitions.
What is Cash Flow?
Cash flow is the movement of money in and out of a business. For a business owner, all your transactions are represented by your cash flow. When more money flows in your account, you have a positive cash flow. On the downside, if you have more money flowing out than cash coming in, then you may have a cash flow problem.
To better wrap your head around it, let’s break cash flow down into two sections: inflows and outflows.
Inflows is an injection of cash into a business. They can be broken down further into three subcategories:
- Investments: Money made from company investments, like selling an asset or long held investments
- Operations: When customers pay you. This means daily income from goods and services or debts through accounts receivable
- Financing: Money from investors or donor contributions
Outflows is the cash disbursed by your company over time. Like inflows, they are categorised by the same three subcategories:
- Investments: buying fixed assets such as equipment, furniture, buildings and vehicles. Or investing in assets like other companies
- Operations: the costs of running a business, like salaries, rent, mortgages and supplies
- Financing: payments for liabilities like loans and equity. Business owner’s draws and distributions
What Are Cash Flow Problems in Business?
When it comes to cash flow, there’s a fine line between good and bad. Problems occur when outflows outweigh your inflows. Or in other words, when there’s more money leaving your business than there is coming in.
Let’s say you’re a shop owner expecting big returns on a new product. You order the materials from your supplier and put the item up for sale. However, it fails to sell. At this point, your outgoings exceed your incomings. What’s more, you’re unable to pay your supplier, which can damage your relationship with them, and in turn, your reputation with others.
The strained supplier relationship is just one example of a cash flow problem. A lot of the time, you may not even realise you have one until it’s staring you in the face. To make sure that doesn’t happen, here’s a list of warning signs that may suggest you have a cash flow problem:
Signs you may have a cash flow problem:
- Unable to repay debt
- Personal income used to subsidise business expenses
- Frustration from employees around rate/speed of pay
- Marketing activity slows or stops
What are the Common Causes of Cash Flow Problems?
There are many reasons why your business may experience problems with cash flow. From poor planning to seasonal changes, the root cause is sometimes controllable. Other times, it is out of your hands altogether.
Here, we take a look at the most common reasons why your business may be struggling with cash flow. Better yet, here are some tips you can take to put you (and your cash flow) in the positive direction.
Cause: Late Payments
Late payments, otherwise known as outstanding receivables, can affect any business. In fact, 58% of small to medium-sized businesses across the UK are waiting on late payments from customers. As you well know, businesses can only function when they’re generating income. So when you’re left waiting for payments to come in, it can put an enormous strain on your day-to-day work.
Solution: Get Paid Faster
While it sounds too good to be true, there are plenty of things you can do to get paid on time. It’s all about being proactive. Whether that’s sending invoices early, chasing, or even asking for a deposit upfront, being bold and brave is key to speeding things up.
Chasing invoices can be daunting. And the thought of awkward client conversations is why many business owners avoid them for as long as they can. The reality is: everyone likes to get paid on time. So asking politely and being proactive shouldn’t worry you. If someone owes you money, you should always feel you have the right to go and get it.
Cause: Profit margins too low
As a business owner, we’re sure you need no introduction to profit margins. You may be selling your product/service at prices that are too low, or it’s not selling at all. Either way, if inventory costs outweigh your return on sales, it can have severe consequences for your business.
Solution: Scale Back
If your sales aren’t performing, it might be a good time to assess what you can do to help balance things out. From a sales point of view, that may mean scaling back your products/services to a select few, and increasing the price. This only has to be temporary until you get your profit margins back where they should be.
Away from sales, if you’re looking to cut back on your outgoings, check your expenses. Are there premium services that you could live without for the time being? Weigh up the essential and non-essential luxuries you need to run your business. Ask difficult questions of yourself – and the suppliers you depend on. Again, it only has to be temporary, but by scaling back you can bounce back to profitability.
Cause: Growing Too Fast
There are some businesses that feel they need to grow as fast as possible, regardless of how they do so. Unfortunately, though, it’s not that simple. Like a teenage growth spurt, businesses can soon outgrow the things that hold them together. You may lose track of finances or leave customer service behind. Either way, rapid scaling can soon turn sour if the correct processes aren’t in place.
Solution: Refine your billing structure
Growth is great – until your outgoings outpace your incoming revenue. Slowing down may be the easy answer, but try telling that to a business owner. Rather than going slow, it’s important you install a framework that can cope with the rate of growth. And, if you’re to refine one area, you should prioritise how people pay you.
Things like auto billing and online payments tick boxes for both you and your customers. With auto billing, the payment is automatically collected from the customer’s bank account, while online payment is now the go-to solution based on its speed and convenience. That means you’re more likely to get paid on a regular basis – and quicker. With that in mind, you can plan better and streamline your cash flow.
There’s plenty of tech available to help make your billing process even more efficient. Whether that’s a receipt scanning tool like Dext, or specialist online banking providers for businesses, like Starling or Tide, the opportunity to align and streamline your business finances, lies in technology.
Cause: Poor Forecasting and Bookkeeping
When starting out, most businesses can get away with basic bookkeeping. For many, that means keeping an eye on expense management and tracking spending and income. At this stage, the bare minimum does the job. But as your business grows and finances become even more complex, basic doesn’t quite cut it.
Solution: Forecast & Automate
For starters, introduce a cash flow forecast. This is an estimate of a business’s future financial position. Through anticipating accounts payable and receivables, it adds structure and shows you where you’re heading.
The second option is to improve your bookkeeping practices through automation. While these types of software – including us here at Dext – aren’t direct cash flow solutions, they do provide clear, up-to-date oversight of the numbers. That means fewer mistakes and less time spent uploading that paperwork yourself. Accuracy breeds confidence – and confidence is essential when managing cash flow problems in business.
For many businesses, seasonality poses a severe but often unavoidable dilemma. For instance, let’s imagine you’re a retailer that specialises in summer clothing. In many warmer parts of the world, that would provide a steady revenue stream year round. But here in the UK, the demand for summer clothing doesn’t arrive until May or June (if we’re lucky). That’s a lot of time without any sales.
The question, then, is what does that retailer do across the year to preserve their cash flow and optimise it at the height of their season?
Solution: Prepare and Optimise
If limit your shop window to a few months, you’ve got to get it right when your peak season comes along. But that doesn’t mean you can’t start generating interest before. Tap into people’s anticipation, like the buzz around summer here in the UK. You can ramp up marketing activity and, who knows, you might even generate some pre season sales?
When your season does arrive, do your best to optimise your supply chain. That means buying small and often, saving you from missing out on cash spent on any leftover stock. It also means you should get paid on time during your busy periods. You can apply the same billing practices we’ve already discussed here to ensure you get paid quicker.
The Final Word
Cash flow problems are universal. There’s not a business out there exempt from the disruption they can cause. There are, however, businesses equipped to address and manage them before they become serious. That’s because they know the warning signs and appreciate the root cause of the problems.
We hope this blog has helped you identify some of the cash flow problems you might be facing. Better yet, you now have a few starter solutions on how to deal with them. As we mentioned at the start, cash flow concerns are often unavoidable – now more so than ever. But it’s how you deal with them that sets your business apart.
To find out more about cash flow and how to improve it within your own business, download our Beginner’s Guide to Smart Cash Flow by clicking below.