When a business cannot cover its debts, payroll expenses, or inventory stockings, cash flow problems arise. Many of these can be temporary and only pose a serious threat if they become chronic. The first four solutions are types of financing that can be used when a business is in need of quick relief while the latter six are managerial adjustments for future security.
Small business owners need to pay interest, pay debt payments and pay short-term finance. It can be a very tough time for the business, but there are ways to solve cash flow problems. In this blog, we will cover all the ways to resolve company cash flow problems.
What are the causes of Poor Cash Flow
- Seasonal businesses fluctuations
- An inability to send invoices out and collect a customer's late payment.
- An over-reliance on a small number of customers
- Holding too much stock
- Low-profit margins
- Poor financial planning
- Spending with no discipline
- High overheads
- Big debts
- Poor credit controls and ongoing checks on their standing
Ways to resolve business cash flow problems
There are two categories to avoid cash flow problems; financial and managerial.
Financing: Short-term Business Loans
A short-term loan can have a higher annual predicted interest rate than long-term loans, but the total cost of capital may be less.
Financing: Lines of credit for small businesses
A business needs a line of credit almost like it needs another limb at times. It’s often overlooked, especially by small businesses with one or two workers to share the responsibility, but there are many benefits that come out of having a working line.
Financing: Other Cash Flow Solutions
Giving customers cash may be necessary to ensure they are happy with their purchases. As an alternative, business owners should invest in a credit card or take out a loan. However, using this as your primary form of payment will likely lead to high-interest rates that could destroy your business' finances.
Managerial: Renegotiate Supplier Contracts
Businesses struggling with cash flow problems need a permanent managerial solution to increase disposable income. One cause of the cash flow problem maybe how much they are paying suppliers - many businesses notice the results and impact of renegotiating their contracts within 30 days.
Managerial: Cut costs/Lower expenditure
Business owners often cut costs and expenses in an effort to shore up any potential cash issues. Cutting out big-dollar items can negatively affect revenue, though, so there are other measures that can be taken without affecting operations.
To increase the cash flow in a business, non-essential business expenses should be stopped. Activities like landscaping or pest removal can often be sacrificed, as they are not necessary to the operation of the company. In these dire situations, some vendors may offer discounts for suspended services later on when they’ve recovered from any losses.
Saving money is a challenge for all business owners regardless of the size or type. There are some services that can cost less with competition, and those without contracts can look around to see if others offer cheaper options.
Managerial: Monitor and control growth
Business owners are excited about growth, and for a good reason. Growth means more employees, higher revenue, new opportunities, and personal success. However unmonitored and unmoderated growth can cause cash flow issues for businesses with no other options to turn customers away during shortage periods.
Excessive growth or overtrading can increase the business' expenses and receivables in the short term while reducing their revenue. This will result in an inability to produce adequate cash flow, which may prompt a company to take out loans when money is tight. However, repeated overtrading can lead only result in larger financial problems and perhaps even bankruptcy.
Cash Flow Forecast
Following on the last point of monitoring growth, using a detailed cash flow forecast will allow you to keep on top of your company's cash flow. Manageable growth can be achieved with a forward-looking forecast that includes all planned and unplanned expenses as well as income.
If you do not have access to formal cash flow forecasting software, you can simply use Microsoft Excel. However, there are many other businesses offering comparable solutions for example; Primetric, Payrefernece, Payflou.
The direct method for forecasting cash flow is less popular than the indirect method but it can be simple to use. The main reason it’s not as popular is that you can't generate a cash flow forecast with standard reports from your accounting system. If you're creating a forecast, looking into the future, then it might be a better choice for you than static reports on cash flows.
Profit and Loss
What is Profit?
Profit refers to sales revenue less direct costs and overheads (i.e. rent, utilities, insurance, office supplies) It is a financial gain resulting from a transaction or an event that adds value to the business of the trader in terms of future cash-flows.
What is Loss?
Loss refers to the opposite of profit and it occurs when costs exceed revenue. It can be caused by wrong pricing decisions, ineffective marketing strategies, or loss-making products.
P&L briefly explained
The P&L is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period. During a specified time frame (usually one quarter or one year), it provides information about profit and loss for an organization.
These records provide information about a company's ability or inability to generate profit by increasing revenue, reducing costs, or both.
Some refer to the P&L statement as a statement of profit and loss, income statement, statement of operations, statement of financial results, or income; earnings statement; expense statement.
Non-profit organizations track their revenue and expenses in the financial report called the statement of activities. P&L management refers to how a company handles its P&L statement through revenue and cost management.
Now we have explained the mainstream ways to fix cash flow problems, we also have set out many other ways. We want to cover all bases so that you're never stuck.
How to rectify poor cash flow
If you have immediate cash flow problems or experience cash flow problems, emergency business funding could be a brilliant quick fix however it is not a long-term fix.
Review your finances
If you're experiencing cash flow difficulties and regularly experience them, then it's best if you take a long hard look at your company's finances. To do so, consider working with an accountant to review all of the company's income and expenditures. This should be carefully planned as savings or improvements may only be made in specific areas of revenue or spending.
For example, a cap on overtime might save business costs while reducing profit; moving to a cheaper location might reduce your rent expenses but could cost you in prestige and foot traffic.
Keep track of your receipts
The most common cause of cash flow problems is when customers decide not to pay. This leaves you with few options other than sending legal documents and waiting for payment. However, one thing which can be improved is the invoices that are sent out: they should be accurate and straightforward.
It’s worth requesting written confirmation of receipt when you send out invoices to verify that they were received. That will reduce the likelihood of an email problem or delay from happening early on, and it shows that attention is being given to this process.
Make business development an ongoing process
Marketing and business development are an important part of maintaining healthy cash flow. With the feast and famine cycle familiar to many small businesses, owners need a steady source without fluctuation.
Even during a busy time, it’s important to continue with marketing and business development. That will help shorten the period you are without significant income and reduce the cash flow problems that could result from this interruption.
Create an organized accounting system
All accredited companies must keep full and proper financial records or they could face late filing and payment penalties and even be accused of unfit conduct as a director. However, it’s not enough to file your BAS and bank statements on time. Make sure your accounting records are also put into a computerized system that will help you track trends and patterns in cash flow. That way, you won’t miss any cost-saving opportunities nor face any unexpected expense problems.