Solving business cash flow problems

What causes cash flow problems?

There are many different causes of cash flow problems. Certain industries often face their own particular cash flow challenges. For example, in the construction industry, cost overruns, inconsistent project timelines and the requirement to pay subcontractors upfront while waiting for customer payments can create cash flow shortfalls. In the retail sector, overstocking, seasonal fluctuations and high operating costs are often the source of problems.

Other common causes of cash flow problems include:

• Low profit margins
• Late customer payments
• An over-reliance on one or two large clients
• Spending money too freely
• Poor credit control practices
• Obtaining credit that’s too expensive or ill-suited to the business
• Changes in customer demand
• Changes in the wider economic environment

Even something you typically associate with a healthy business, like rapid growth, can cause cash flow problems. It can prompt businesses to over-invest in resources such as staff and stock while leaving themselves short on funds to cover unexpected expenses.

How to prevent and solve business cash flow problems

Whatever industry you operate in, you should understand the common causes of cash flow problems, take preemptive steps to mitigate them and be familiar with measures to resolve them if they occur. 

Here are some tried and tested strategies to employ.

Cut costs

Cutting costs is a part of cash flow problem prevention rather than the cure as it can take time. However, reviewing your expenses regularly and identifying and eliminating unnecessary spending can be effective. 

You can downsize your premises, refocus on core product lines, reduce your marketing spend, optimise stock levels and minimise unnecessary travel. You may also be able to reduce your staffing costs by replacing full-time team members with freelance and part-time workers.

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Accelerate your receivables

Increasing the speed of customer payments can reduce the likelihood of cash flow problems. In some industries, 30, 60 and even 90-day payment terms are the norm. But even where long payment terms are unavoidable, there are still steps you can take. For example, you can:

• Offer early payment discounts to incentivise customers to pay you quickly. That will impact profit margins but boost cash flow.
• Ask customers for a partial payment upfront rather than billing them via a single invoice after you’ve delivered the products or services.
• Invoice customers and clients immediately after the delivery of goods or services rather than sending out all your invoices on a particular day of the month.
• Use invoice finance to release up to 90% of the value of an invoice without having to wait for a customer to pay it. 
• Formalise the process of identifying late payers, chasing the payment and applying financial penalties.  

Restructure your debts

If you have expensive debts that drain your cash flow, it may be possible to restructure them to make them more manageable. For example, you could refinance a loan or use a debt consolidation product to combine multiple debts into a single repayment. 

If you’re struggling to pay your debts, you could enter into informal negotiations with your creditors. Agreeing to pay what you owe over a longer period will leave more cash in the business. If unmanageable tax bills are causing a cash flow crisis, negotiating an HMRC Time to Pay Arrangement with HMRC will allow you to pay your tax arrears over a typical period of six months.  

Explore your funding options

Alternative funding methods can boost your liquidity if cash flow becomes a problem. Bank loans, overdrafts and credit cards are conventional borrowing options, but they can be expensive, take time to arrange and may not be available if you’ve reached your credit limit. 

Other options to explore include asset-based financing, which allows you to borrow money against a company asset. A merchant cash advance, where you receive a quick cash injection and repay the lender from future credit card sales, can provide a solution for retail, hospitality and online businesses. You could also consider invoice finance if you have a history of issuing invoices to customers and clients who are reliable payers.   

Sell non-essential assets

If you’re facing a cash flow crisis and need to raise money quickly, another option is to sell non-essential business assets. These are the things you can sell without impacting your daily operations. This is only a temporary solution, as you can only sell an unnecessary item once, but it can be a quick and effective way to improve liquidity.

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Enter into a Company Voluntary Arrangement (CVA)

If your cash flow problem is so serious that you’re facing increasing creditor pressure and can no longer pay your debts when they’re due, a Company Voluntary Arrangement could be a viable solution. 

This formal insolvency procedure enables you to spread your unsecured debt repayments over up to five years. You must work with an Insolvency Practitioner to create an affordable repayment proposal, and the majority of your creditors (by the value of their debt) will have to accept it. If they do, the CVA will become legally binding and your debts will usually be frozen so no interest or charges can be added.    

Pre-Pack Administration

Pre-Pack Administration is a potential solution if your cash flow crisis has led to insolvency. In this process, some or all of the business’s assets are sold to a pre-arranged buyer. That buyer, who is often an existing company director or owner, buys the assets from the business to generate cash to repay the creditors. The business can then continue to trade under a new company and with a clean financial slate.

Need advice?

If you are experiencing serious or persistent cash flow issues, you need to act quickly. At Real Business Rescue, we will assess your financial circumstances and advise you on your options. We can also implement formal insolvency procedures such as a Company Voluntary Arrangement and Pre-Pack Administration. Contact our team for a free, same-day consultation or arrange a meeting at one of our UK offices.