Christopher Andersen
Written By Chris Andersen
Director & Licensed Insolvency Practitioner
July 12th, 2023

While profitability might be the ultimate metric of business success, having a healthy level of cash flow on a day-to-day basis is vital if your company is to survive and grow.

In this guide, we’re going to look at what cash flow is, what form cash flow problems commonly take and how they can be solved. 

Cash Flow Problems

What is Cash Flow? 

Cash flow is the movement of money into and out of your business on a daily basis.

Cash will flow into the business in the form of payments from customers and out of the business in employee wages, debt repayments, taxes, utility bills and more.

As a business owner, you must manage and balance the inflows and outflows of cash so you can run the business effectively. Fail to do so and you could develop a cash flow problem. 

What is a Company Cash Flow Problem?

A cash flow problem occurs when the amount of money flowing out of the company outweighs the cash coming in. This causes a lack of liquidity, which can inhibit your ability to make payments to suppliers, repay loans, pay your bills and run the business effectively.

Even profitable businesses can experience issues with cash flow, and in fact, businesses that are growing very quickly are particularly susceptible to this issue. That’s because they can spend heavily to fund their continued growth without having the revenues to sustain such a high level of spending.  

How Many Businesses Fail due to Cash Flow Problems?

Around 50,000 UK businesses fail every year due to a lack of cash flow. Of those companies, 65 percent say that a lack of access to funding is responsible for their cash flow issues, while many others complain that the working capital they need to run and grow their businesses is tied up in the form of late-paying customers.

The late payment culture in the UK is certainly taking its toll, with 24 percent of businesses saying that late payments are a threat to their survival. That’s the highest rate of any country in Europe.

What Types of Businesses are Prone to Cash Flow Problems?

Startups in every industry are particularly vulnerable to cash flow problems. Costs are incurred in the process of setting up the business, such as shop fitting, marketing, paying rent and buying stock, before the company generates any revenue. Suppliers can also demand immediate or early payment from startups, which ties up more cash.

This type of business also has no cash reserves built up from profitable trading, making it a particularly challenging period when the careful management of cash is essential.   

Although startups are particularly susceptible, just about every type of business can be affected by problems with cash flow. However, companies that operate in some sectors are more susceptible than others. The businesses that suffer the most tend to be those that operate in industries where long payment terms of 60, 90 and even 120 days are the norm or where a significant outlay must be made before a customer payment is received. 

Businesses that are prone to cash flow issues include:

  • Construction firms –  Payment terms that can be as long as 120 days are common in the construction industry. This is particularly the case for contractors and subcontractors further down the supply chain. During this time, employees still need to be paid and raw materials must be purchased, putting a real strain on cash.
  • Recruitment agencies – Many recruiters do not bill their clients until after a candidate has been successfully placed. Recruiters then have to wait another 30 or 60 days for the client to make a payment, depending on their payment terms, making cash flow an ongoing concern.   
  • Utility providers – Smaller utility providers that do not have the reserves of the big companies can be put under pressure by non-paying customers. Although service can be cut off, that does not make up for the utilities already provided but not paid for.
  • Wholesalers – Customers that make large quantity orders often demand lengthier payment terms. As well as having to wait a long time for payment, it’s proven that the longer you go from the purchase point, the less likely you are to receive payment. That makes cash flow a constant battle for many wholesalers.
  • Manufacturing Low profit margins, holding too much stock and giving customers too much credit are all common causes of cash flow shortfalls in the manufacturing industry.    

Why do Businesses Have Cash Flow Problems?

There are many different causes of cash flow problems in small and medium-sized companies that can be broadly categorised into three areas:  

  • Poor sales
  • Ineffective cash flow management
  • Inadequate credit control and collections processes

Here are some of the most common causes of company cash flow problems along with potential solutions that could help to get you back on track: 

  1. Your customers are slow to make payments

Customer invoices that take weeks and even months to be paid are the most common cause of cash-flow problems for SMEs. Big companies are accused of ignoring the rules when it comes to paying their smaller suppliers, with many imposing long payment terms and still making late payments. Continued slow payments, particularly from a major customer, will create a financial burden that can make it very difficult to run your business effectively, particularly if it’s growing quickly. 

The solution: One potential solution is to incentivise customers to pay your invoices more quickly. An early payment discount of 2-3 percent could be effective, although that will impact your profit margin. Invoice finance is another option. This line of credit releases up to 95 percent of the value of an invoice within 24 hours of the invoice being sent to the customer. The finance provider will collect the payment from the customer when the invoice is due and pay you the balance, minus their fee. 

  1. The overheads are too high

Overheads are the costs that are not tied directly to the sale of a product or service. A few examples include rent, utility bills, insurance, travel, accounting and legal expenses. It’s quite common for a small business’s overheads to increase disproportionately to the revenue the business generates, which will inevitably put a strain on cash. 

The solution: Reducing a business’s overheads is not always easy. Cutting the overheads too much could damage the sales of the company, while not reducing them enough will continue to put restrictions on cash. The best approach is to audit your expenses and only cut the costs that will not directly impact on sales. That could be by reducing your rent, bringing the accounting function in-house or looking for cheaper utility providers. 

  1. There are no cash reserves

Most new businesses have little or no cash reserves due to the simple fact that they’ve not been trading for very long. That can leave them more vulnerable to issues such as late payments, the loss of a key customer or a seasonal dip in sales.  

The solution: The solution is to start building a cash reserve for your business as soon as you can. That can be difficult given that many businesses take several years to become profitable, but diverting a proportion of revenues into a rainy day fund should be a priority. Ideally, you will build a reserve that can cover your business’s expenses for at least three months that you only use in emergencies.

  1. You have expensive debt

The higher level of risk associated with small businesses means that borrowing comes at a cost. That can lead to businesses being saddled by debt repayments they cannot affordably repay. Cash that would be better spent growing the business then has to be redirected to service the debt, leading to a cash flow shortfall.  

The solution: Only borrowing when it’s essential and being extremely cautious about the finance agreements you enter into is vital when growing a business. If your cost of debt is already too high, consider refinancing the loan with a deal that offers a lower interest rate or a longer repayment term. Alternatively, if you have multiple debt products, a debt consolidation loan that combines all of your loans into a single, more affordable repayment could free up the cash you need.

  1. You’re holding too much stock

This is a common problem for manufacturers and wholesalers that keep a warehouse stocked with products. Holding stock can help to fulfil orders more quickly, but if stock levels are too high, it can end up sitting on shelves, tying up your cash and costing you money to store.   

The solution: One solution is to fine-tune your inventory so that you hold stock for the shortest time possible before it’s sold or used in the manufacturing process. However, having key products out of stock is a sure way to lose clients, so you must strike the right balance. For resellers of products, purchase order financing could be used to finance larger sales and help you better manage the supplier expenses associated with big orders. 

  1. You ignore your bookkeeping and financial statements

Keeping accurate accounting records and regularly reviewing financial statements such as payables ageing, cash flow statements and bank statements is essential to keeping track of the money going into and out of the business. Failing to pay enough attention to your bookkeeping and financial statements can also impact your ability to access credit arrangements and pay your taxes correctly. 

The solution: If you prefer to focus on other parts of the business, hire someone to take care of your bookkeeping and produce financial statements for you. They will help you identify potential problems before they happen so you can take action to avoid a cash flow shortfall. 

  1. Too much bad debt

If you sell a product or service to a customer who does not pay, that is a bad debt. Bad debts can be extremely damaging to businesses of every size, but particularly smaller companies that do not have the revenues or reserves to absorb the loss. 

The solution: If non-payment is a problem for your company, you need to carry out thorough credit checking of your customers before you agree to do business with them. You should only provide credit to customers with a solid payment record and a good credit history. For customers that don’t have such a solid track record or are newly established, ask for payment upfront. Although that approach may cost you some sales, at least you will only lose customers that were deemed risky to begin with. 

How do you Solve More Serious Cash Flow Problems?

If the cash flow problems you’re experiencing pose an immediate threat to your business, there are still some potential solutions available to you. If you have reached this point, then it’s a good indicator that your business is insolvent. When your business becomes insolvent, your responsibilities as a company director change and you are legally obliged to act in the best interests of your creditors. If you continue trading with no thought as to how you’ll repay your debts and the company fails, you risk being made personally liable for the company’s debts or disqualified from acting as a director for up to 15 years. That’s why you should contact an insolvency practitioner as soon as you become aware of a serious company cash flow problem.

An insolvency practitioner will be able to discuss your circumstances with you and advise you on the potential routes you could take to keep you out of the courts and save your business. That could include accessing alternative lines of credit, going into administration to restructure the business or entering into a formal debt repayment agreement with your creditors known as a company voluntary arrangement (CVA).

Receive Your Free Consultation

Whatever situation you find yourself in, cash flow problems do not need to bring an end to your business. An initial consultation with our licensed insolvency practitioners is completely free of cost and obligation, so get in touch today for expert assistance to turn your cash flow problems around.