3 min read
Losing sleep? Expenses outpacing revenues? Worried about your ability to pay suppliers, or worse, your ability to pay your staff? You could be dealing with cash flow problems, which as many businesses know all too well, can be the beginning of the end as far as your continuing operations are concerned. However, there are plenty of solutions to cash flow problems that should help get your firm back on track, and improve your overall operational efficiency at the same time. Read on to find out everything you need to know about business cash flow problems, and how to beat them.
What is cash flow?
Cash flow refers to the movement of capital into, through, and out of your business over a specific time period. Rather than debtor amounts, money in the bank, or credit from your suppliers, cash flow is purely concerned with the actual in-flow/out-flow of money through your business. Understanding your firm’s cash flow can provide an excellent insight into your financial health. Think about how many key business processes rely on access to capital – payroll, paying suppliers, fulfilling orders – if you don’t have more money coming in than going out, you could find yourself in serious trouble when it comes to day-to-day operations. And for many small businesses, that’s nothing less than a death sentence.
Cash flow problems explained
So, where do cash flow problems come from? That’s a massive question, and there are many different answers. Late payments are a serious issue, with many UK businesses negatively impacted by late payment on invoices. It’s also important to note that rapid growth can lead to business cash flow problems, since your overheads and expenses may increase disproportionately to your revenues. Overspend is another key issue, while excess inventory (perhaps a result of ineffective forecasting) can also lead to significant cash flow problems, particularly if you have significant holding costs. Bottom line: there are many different reasons why your business could end up dealing with cash flow problems.
Cash flow solutions for small businesses
Fortunately, if you can ride out the initial challenges posed by your business cash flow problems, you can begin to take steps to right the ship. While cash flow solutions for small businesses depend, at least to a certain extent, on the specific issues your business is dealing with, there are certain guidelines that all companies should pay attention to. So, here are our top five methods of solving cash flow problems:
Reduce your expenses – It sounds simple, but the less you have going out, the easier it will be to deal with any potential cash flow problems that you encounter. There are many ways to reduce expenses, for example, you may wish to consider reducing your overheads to free up extra cash. Ensure that you aren’t making new hires if there isn’t a business need for them, and audit your current expenses to see if there’s anything you could go without (examples include expensive software packages you’re rarely using, or office space that could be downsized).
Implementing inventory management strategies – As mentioned earlier, excess inventory can be a contributor to cash flow problems. You should look to implement effective inventory management techniques to get your inventory under control. This can include several different strategies, including regular inventory audits, item-level tagging, and improved forecasting.
Consider invoice factoring – If you’re in need of a short-term cash infusion, invoice factoring could be one of the most effective solutions to cash flow problems for your firm to explore. Essentially, this refers to a form of invoice finance wherein you sell the unpaid invoice to a factoring company, receive 80-90% upfront, and then – upon settlement – you’ll receive the rest of the invoice amount, minus the factoring company’s fee.
Improve your cash flow forecasting – Taking a more long-term approach, another effective method of solving cash flow problems is to improve your company’s cash flow forecasting. This should provide you with a better estimate of the money flowing in and out of your business over a future period, which can help you make better decisions and avoid potential cash flow problems. For example, if your forecast indicates limited cash flows in Q4, you can take steps ahead of time to minimise the damage (i.e., cut costs, launch a sales drive, postpone expansion plans, etc.)
Switch to Direct Debit – The last cash flow solution that we’re going to touch on revolves around payments. Direct Debit is a pull-based payment method that enables your business to take payment as soon as it’s due, meaning that you’re less likely to run into unexpected cash flow problems.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.