What are the causes poor cash flow issues and how should you manage them

What causes poor cash flow issues, and how should you manage them?

Every business wants to maintain a healthy bank balance and healthy cash flow. 

However, is the reality that poor cash flow is causing you an unimaginable amount of stress? Is it eating into your future business plans and cash reserves? Or even worse….is it slowly swallowing up your business whole? 

We know from reports that poor cash flow is one of the main reasons that many SMEs go out of business within three years. 

However, by implementing the right solutions, poor cash flow issues can be avoided, and you can focus on business growth. 

In this post, we look at some of the top reasons for cash flow shortages and the best solutions to manage them. 

Cash flow problems 

When you begin experiencing problems with your cash flow, it will affect: 

  • Suppliers being paid 
  • Invoice unpaid 
  • Business relationships 
  • Reputation 
  • Business credit score 
  • Business rates you could be offered 
  • Ability to purchase stock 
  • Inability to pay staff wages 
  • Contract security. 

Causes of cash flow problems 

Poor cash flow can be summarised as spending more money than what the business has coming in. 

Overspending once or twice isn’t great, but often, you can work around it. However, this is certainly not sustainable in the long term, and you will suffer the consequences. 

Cash flow issues 

Some of the leading causes and reasons why businesses experience cash flow problems include: 

Low profits – low profits mean you don’t have enough cash to cover your outgoings, to build, grow, and to scale. This could be due to poor sales and marketing tactics, low staff productivity, not charging enough for goods and services, uncontrollable outgoings, etc. 

How to manage cash flow problems like this includes a range of solutions, i.e., revamping your marketing strategy, updating your pricing to be more competitive while still being realistic, and setting targets for your staff with rewards and bonuses on offer if these are met. 

Buying what you don’t really need—without a strategic plan and simply buying, buying, and buying some more—will drain your funds fast. Instead, check that what you are purchasing are things that you do actually need. Work out your nice-to-haves vs. your must-haves. 

No formal budget—all businesses, regardless of size, should have a formally documented budget. Creating specific and realistic goals, even slightly overestimating expenses, all help to provide financial focus. Note: Setting a budget is vital, but it should still remain flexible and agile as goals do change! 

High overhead expenses—Are items such as your business rent, utilities, and bills starting to get a little out of hand? Review all of these areas on a regular basis to ensure you’re getting the best deal. Have complete visibility into all outgoings and look at ways you can trim these down. 

Unexpected expenses—If you’re already struggling with poor cash flow, unexpected expenses can hit hard. Examples include equipment failing or staff unexpectedly leaving. To help with these cash flow issues, look to set up a contingency fund to build up your cash reserves in case of such emergencies. 

Too high borrowings—Poor cash flow can also result from borrowing too much and not having the funds to repay it. It’s vital to consider fluctuating interest rates, payment schedules, and other factors when borrowing. You must also stick to a budget and not borrow more than you need, reserving as much cash as possible. 

Uncontrolled growth—if your business is scaling quickly, with expenses spiralling, and no plan in place, it can affect your bottom line. 

Poor financial processes – every business must forecast and budget to keep everything running smoothly. This means it’s vital that you have clearly laid out payment terms, carry out credit checks on your customers, implement robust credit control procedures and practices to manage overdue invoices and make sure you build in follow-ups and chase letters. What are your current payment processes and debts? Can you handle any disruptions to cash flow? Working with professional debt collection agencies is also a great way to help support invoice overdue situations. 

Late payment – the two words that 99% of SMEs experience in business. Late payments are really unhealthy for cash flow. 87% of businesses state that they are paid after the invoice due date. However, ideally, all businesses want and need invoices to be settled on time. To help, make sure you make your payment methods clear and transparent; payment due dates are set, and if payments aren’t made on time, there are consequences, i.e., late payment fees, and interest charges. Look to implement more efficient invoicing, ask for a deposit to secure the order, and more. 

Direct Route – the solution to your cash flow problems 

We understand that cash flow problems are a big headache for SMEs, and you need to develop a plan to avoid them. 

To understand how cash is flowing in and out of your business, it’s essential that you keep on top of your cash flow with good credit control procedures and management – and this is where we can help. 

By helping you reduce the number of invoices paid late and collecting on outstanding invoices, we help keep your cash flow flowing. 

Contact our team today to find out more.