Cash flow problems in theory can be easy to identify. If your outgoing payments exceed your business income and you cannot meet your liabilities as they fall due, then simply you are having cash flow problems. A negative cash flow doesn’t necessarily represent bad business, but you do need to take steps to ensure your business does not run out of cash. However, insufficient cash flow is an issue which needs to be tackled head on as no matter how big or small your business, if you don’t have any cash it will eventually end in downfall.

So what are the likely causes of cash flow problems?

For B2B business a common cause of cash flow shortages is customers not paying their invoices on time. If the business is making plenty of sales, but you’re bills are coming around before you get paid, then at some point the business will run out of cash.

Some businesses can find themselves in trouble through no fault of their own. As you may have to unexpectedly pay a large cost or bill. For some businesses, it can be a case of not planning far enough ahead, or not making sufficient provision when it comes to paying VAT.

Cash flow problems can sometimes be down to a lack of planning. It’s good practice for any business to have a cash flow forecast, taking into account all incomings and any outgoings which could absorb cash. With this, it’s vitally important not to overspend too soon and make sure that you don’t commit to too much stock or staff, if you don’t need it. If you haven’t planned effectively enough, a fluctuation of sales can sometimes cover up underlying problems a business might have, so making sure you take into consideration seasonal deficiencies, or spikes in sales is vitally important to a cashflow forecast.

What is a good indication that you are having problems?

One of the biggest signs that you’re having trouble maintaining a healthy cashflow is a failure to pay your VAT as and when the returns are sent in. If you haven’t been careful beforehand, you may not have sufficient cash when it comes to paying.  Sometimes when planning a cash flow forecast you can foresee these problems and reserve funds, or take out a business overdraft to ensure that the business is covered for these sorts of payments.

As a business owner if you aren’t taking a wage from the business, or even worse are still inputting your own personal money to make ends meet, then it’s a clear problem with cash flow. Perhaps the biggest indication that cash flow is a problem is not paying staff on time. If you have to pay suppliers, or overheads before you can afford to pay staff, then the business could end up losing one of its core elements. One thing that could help in this situation is financial modelling. With it you can build a cash flow model that will help you oversee and ever predict your spending, thus avoiding any future financial inconvenience. If you don’t know how to create cash flow models and actually use them read through this Wall Street Prep guide.

How can I improve cash flow?

The most efficient way to stay on top of cash flow, is by first planning and forecasting effectively. Monitor your forecasts and update them taking into account any variances in your original estimates. Based on your forecasts, arrange a business overdraft sufficient to cover any large costs, and seasonal variations. An overdraft will be agreed with the lender beforehand and it will be appropriate to the needs of the business, as well as the banks assessment of the risk.

If the business is struggling there are things you can do to pick up your cash flow. Make full use of any payment terms set by creditors, if you are waiting on unpaid invoices from your customers, then use the maximum amounts of days you have available to pay your creditors. If you are having trouble collecting invoices, a great way to stay ahead is to ask customers to pay a deposit and make it part of the business norm. Ensuring that you issue invoices as soon as possible is also key, and then if payment is not paid on the due date follow it up promptly.

Having a good line of communication with your suppliers can also be a great advantage. Tell them about your situations. As a customer they will want you to succeed so if you can make use of late payments, see if you can.

For B2B companies, invoice financing can be a very efficient way moving forward. This allows a business to take out a loan from a factoring company, based on the value of the invoices available. So, you’re not borrowing anything that you wouldn’t already be owed. A factoring company lends you a percentage of the invoice available, before then collecting the full amount from your customers. The factoring company will then take their cut and give you any remaining credit owed. This option, however, is only available to B2B businesses which issue invoices

Elliot Preece