While revenue and profit are important for business growth, cash flow is king.
If cash flow problems go unattended for too long, you could find your business in dire financial straits. According to the ASIC, inadequate cash flow is the number one cause of business failure in Australia.
If you can spot potential problems ahead of time, you can take steps to address them before they impact your business. But it can be hard to notice liquidity problems early if you don’t know what to look for.
In this guide, we’ll explore the seveneight most common cash flow problems. We’ll also reveal how to fix them and get your business moving again.
Cash Flow Problems Explained
Cash flow problems are financial issues that occur whenever a business doesn’t have enough incoming cash to cover liabilities or ongoing expenses.
Even a profitable business can encounter cash flow problems.
For example, if your business experiences a sudden increase in demand, you need to purchase more inventory and cover increased staffing costs to process the additional orders.
In most cases, these expenses would need to be paid before you receive payment from your customers. The gap between outgoings and incomings could create a cash flow problem.
How Can Cash Flow Problems Affect Small and Medium-Sized Businesses?
Cash flow problems can affect SMEs in many ways. For example, a minor cash flow gap may result in a short-term increase in borrowing, but a serious liquidity problem could stunt business growth or even cause insolvency.
The most common issues caused by cash flow problems include:
- Missed or late debt repayments
- Late payments to vendors or suppliers
- Delayed employee wages
- Reduced customer satisfaction
- Missed opportunities to grow the business
- Additional debt
If left unchecked, multiple cash flow problems compound and can threaten the viability of the business. It’s important to identify and address cash flow problems quickly.
7 Common Cash Flow Problems and Solutions
Here’s a breakdown of the most common cash flow problems and potential solutions to get your business back on track.
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Not Enough Cash Reserves
Cash reserves are essentially the money your business has saved up for a “rainy day”. You can also use cash reserves to fund business expansion, pay debts, and cover operating expenses when cash flow slows down.
Unfortunately, many businesses don’t have additional cash reserves to fall back on. Any sudden increase in operating expenses could cause liquidity issues when you don’t have enough cash on hand.
The Solution
You can fix the cash reserve problem with predictive forecasting. Creating a cash flow forecast can help you anticipate your cash flow each month. You can see how much money you need to cover expenses over a set period.
If saving a substantial cash reserve is an unrealistic goal, you should look at potential lending options you can access when needed.
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Excessive Borrowing
A business can get into financial trouble if it practices excessive borrowing. Too much debt can cause interest rates and payments to build up so much that they affect your cash flow and prevent you from paying for other business expenses.
The Solution
Almost every business seeks financing at some point. But it’s important to choose the right type of financing for your needs and avoid borrowing more than necessary.
If debt repayments are causing cash flow issues, you can look into refinancing current high-interest debts. A Secured Business Loan can be an effective way to consolidate existing debt. For example, if you have credit card debt or a high-interest overdraft, a Business Loan may help you to reduce monthly payments and interest fees.
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Decreasing Sales
There are lots of potential causes for decreasing sales volume. This can be due to seasonality, broader economic conditions, and other factors. If you make fewer sales, you will naturally see cash flow reduce as less money flows into your business.
The Solution
Marketing is key to getting your products and services in front of the right prospects. According to the latest Gartner 2022 CMO Spend and Strategy Survey, the average marketing budget is 9.5% of total company revenue. But the right budget for your business will depend on your industry, life cycle, and other factors.
It’s also important to communicate any sales volume goals with your marketing team. When your marketing team knows which products you want to focus on, they can create campaigns and promotional material that supports your sales goals.
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Extended Payment Terms/Outstanding Receivables
Some industries have longer standard payment terms than others. Many businesses also offer extended payment terms to attract new customers. While this can encourage sales, it can also have a negative impact on cash flow.
In many cases, you’ll need to pay suppliers, wages, and overheads before receiving payment from your customers. This can cause a cash flow gap.
The Solution
The best way to address late payments or outstanding receivables is to review your payment terms and collection policies. There are several ways you can encourage faster customer payments, including offering early payment discounts.
Once you have better control over your outstanding receivables, you can look into invoice financing products. Invoice Finance is a type of business finance that allows you to use your outstanding sales invoices as collateral for financing.
You can access up to 95% of the invoice value as a cash advance. Then, when your customer pays the invoice, you receive the remaining balance, less fees. In short, invoice financing helps you get paid faster for the products and services your business has already sold.
You can learn more about this type of funding in our guide, The Pros and Cons of Invoice Financing.
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Excessive Inventory
Overinvesting in inventory can tie up capital and reduce liquidity. You also risk getting stuck with products that you are unable to sell. There are a number of potential causes of excess inventory, including supply chain mismanagement, cancelled orders, and inaccurate sales projections.
The Solution
To fix this cash flow problem, you should consider an inventory management system. This will help you balance your inventory and predict how much you should order ahead of time. It can also help you avoid understocking and leaving your customers disappointed.
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Seasonal Cash Flow Fluctuations
Many businesses operate with seasonal business models. If you make the most of your money for the year in a single season, working capital can become stretched for the rest of the year.
Cash flow for seasonal businesses is uneven. So it’s important to be proactive about your business finances and make sure you can manage the imbalance in cash flow.
The Solution
Accurate cash flow projections and sales forecasting are key to managing seasonal fluctuations. You need to plan for seasonal changes, budget appropriately, and avoid overspending in the off-season without compromising your business plan.
It’s also important to buy enough inventory to capitalise on the busy periods when sales peak. Trade Finance can be a useful financing option if you need to raise capital to purchase inventory and pay overseas or domestic suppliers.
With increased purchasing power, you may also be able to negotiate better terms with your suppliers.
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Uncontrolled Growth
A growing business is cash hungry. As your business grows, so do your expenses. You need to be able to cover your overheads and fund new orders. That requires investment.
If you can’t raise enough capital, you risk losing out on opportunities and turning away potential customers. Invest too much, and you risk stretching your working capital and experiencing cash flow problems.
The Solution
Convenient access to financing is key to sustainable business growth. Debtor Finance is one of the best ways to ensure cash inflows keep up with sales. You can use your accounts receivables to secure a flexible line of credit.
Unlike a bank loan or overdraft, the credit limit increases with sales revenue. As you grow and make more sales, you can access more funding.
Read our case study to discover how steel distributor Steelforce used Debtor Finance to fuel business growth.
Fund Cash Flow With ScotPac
Most cash flow problems are predictable and preventable. There is a range of financing options and strategies you can use to increase the flow of money through your business.
If you need some guidance, our team of Business Finance experts can help. We’ve been a trusted financing partner for SMEs in Australia and New Zealand for over 30 years.
We’ll advise you on the right strategy and arrange a financing package that gets you the funding you need when you need it. Give us a call or fill in our online enquiry form today.
