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• 25 Oct

  How To Solve Cash Flow Problems

  If you are looking for a solution how to solve cash flow problems for your company, there is a simple solution in the form of invoice finance. However, below we have also set out a comprehensive list of ideas and tips to improve the flow of cash through a company.

  How To Solve Cash Flow Problems

  Firstly, let's look at the underlying causes and then possible solutions. According to our poll of 100 UK SMEs, cash flow was the second-largest issue they faced.

  What Are The Causes

  Cash flow problems occur when the income of a business is too low or not received quickly enough to settle its expenses. There can be a multitude of causes, which can include:

  • Income Deficit - having an insufficient income to cover your expenses. In some cases, this can occur if there is a fall in the level of your sales, such as losing a customer, for instance. Or it can result from an increase in your expenses that is not in line with an increase in income. For example, this could be caused by a supplier raising prices. You may need to grow your customer base to improve your situation.
    
    
  • Excess Credit - customers take too much trade credit and hence take too long to pay you. Companies often have a sales ledger made up of numerous invoices which are not yet paid, where customers tend to take credit terms in excess of the terms allowed in some cases.
    
    
  • Expenditure - large one-off expenditures can have an impact on your cash position. This could be a large tax bill, such as your quarterly VAT, or it could be some other major purchase. Alternatively, it may be smaller regular expenses that are adding up.
    
    
  • Growth - although the goal of many businesses is growth, this can lead to problems funding that expansion. If you should land a large order or if your sales are seasonally concentrated, it can lead to money pressures that require additional working capital. Rapid growth can lead to a situation called "over-trading", where your need for capital exceeds the amount of cash that is available.

  Solutions To Cash Flow Issues

  The solution depends somewhat on the cause of the situation. If a decrease or lack of sales has led to problems, then trying to increase your level of sales might be the most sensible option. However, in the short term, you may need to get some funding to get you through, whilst you address the issue.

  The simplest solution is to inject some short-term funding into your business. Invoice finance is ideally suited for this kind of situation. It releases the cash that is tied up in your unpaid sales invoices, and you can use this money for any purpose within your business. This means that you can use it to pay your suppliers more quickly or to settle one-off expenses such as tax bills.

  The service continues to work to improve your business cash flow by releasing part of the value of future sales invoices immediately, rather than you having to wait for customers to pay. In this way, the cash flow of your business is sped up. Please see our guide to invoice finance for details of exactly how this service can improve the working capital position of your company.

  Other Ways To Improve Cash Flow

  While invoice finance is often the simplest and fastest way to release cash tied up in unpaid invoices, there are other practical steps you can take to strengthen your cash flow position. Below is our list of ideas and tips to improve cash flow:

  1. Keep Track Of Your Finances - Regularly monitor your cash flow to spot any patterns in income or spending. Forecasting ahead can help you predict and prepare for shortfalls before they happen.
  2. Build A Safety Net - If possible, aim to build up a cash reserve of three to six months’ worth of operating costs to give yourself a buffer against unexpected expenses.
  3. Improve How You Get Paid - Make sure you send invoices as soon as work is completed, and that they are clear and accurate. Follow up quickly on any late payments. You could also consider offering small discounts to customers who pay early or giving them the option to pay in instalments, helping to bring money in faster.
  4. Offer Flexible Payment Options - The easier you make it for customers to pay, the sooner you are likely to receive your money. Accepting multiple payment methods and offering payment plans can both help.
  5. Review Your Pricing Strategy - Consider whether a small price increase could help improve your cash position, as long as it remains fair and competitive for customers.
  6. Increase Your Sales Income  - Look for opportunities to upsell or cross-sell to existing customers, and consider running occasional promotions to boost sales quickly. Diversifying into new products or services can also create additional income streams.
  7. Manage Your Costs Carefully - Audit your expenses and cut out anything that isn’t directly supporting your income. Reducing waste, reviewing subscriptions and focusing on high-margin products can all improve your cash flow. See this article about how to do a cost audit by CapitalOnTap.
  8. Negotiate With Suppliers - Ask suppliers if you can extend payment terms to give yourself more time to pay. Avoid holding too much stock as it ties up cash, and try consolidating supplier payments to reduce transaction fees.
  9. Use Funding Strategically - If needed, short-term finance such as an overdraft or line of credit can help cover temporary gaps, but check the costs carefully. In some cases, applying for grants or using business credit cards (paid off quickly to avoid interest) can also support your cash flow.
  10. Strengthen Your Financial Processes  - Consider using cash flow management software to track your finances in real-time. Training your team to understand the importance of cash flow and setting clear spending policies can help everyone work towards protecting the financial health of the business.
  11. Adjust Your Business Model If Needed - Introducing subscription models, offering flexible payment options, or refining your pricing strategy can improve the predictability of your income and support stronger cash flow to help solve cash flow problems.

  By Mr Glenn Blackman