How to spot and stop cash flow problems in your business before they happen

No business can operate without cash flow. When cash dries up, businesses struggle to meet payroll, pay suppliers or invest in their growth.

However, with proper planning and the correct support, cash flow problems can often be identified and addressed before they become an issue.

The key? Proactive financial management, which allows you to anticipate gaps in your finances before they occur, not once they have happened.

Why cash flow issues happen

There are many reasons why more money can be going out of a business than is coming in, even highly profitable businesses can face this struggle.

A cash flow crisis shouldn’t be taken lightly, as 23 per cent of all insolvencies in the UK are due to cash flow crises caused by late payments.

So, why do businesses run into issues with cash flow?

Well, as identified, late payments are a key issue for many businesses. The Government is due to take further action on this, but it has been a perennial issue for SMEs for a long time.

Another common issue is holding money in illiquid assets. Some people think the more the better when it comes to stock. However, having too much money tied up in unsold inventory means it can’t be used on day-to-day bills.

Businesses can also struggle with cash flow issues if their prices are too low, but their overhead costs are too high.

The cash that is generated from sales doesn’t cover business expenses leading to massive issues with cash flow. Margins shrink where pricing isn’t adjusted for inflation and over time cash gets tighter and tighter.

It is important for businesses to look out for any potential cash flow issues and then plan to ensure that eventuality doesn’t happen.

Early warning signs to look for

Rising revenue with stagnant cash proves to be one of the most common signs of cash flow issues. When sales and revenue are up but profit margins are shrinking, it is a sure sign that cash flow issues are imminent.

Sometimes offering discounts can be a good idea to move old stock. However, if a business is relying on discounts to bring in immediate cash, it is again an early warning sign of cash flow issues.

If a business is relying heavily on business credit cards, bank overdrafts or lines of credit for everyday running costs, the business is operating outside its means. If they are forced to prioritise one creditor over another based on who is pursuing the hardest, it may be time to reconsider the business’s finances.

Finally, falling behind on taxes is a major red flag that a business is experiencing cash flow issues. Delaying VAT, PAYE or Corporation Tax is a major sign that a business cannot meet its core financial obligations.

How to prevent cash flow problems

Now you know the signs to look out for, you need to know how to prevent these issues:

Speed up incomings – Send out invoices the moment a job is completed and ensure you set up automatic invoice follow-ups after a week or two. It is also advisable to require deposits for large amounts of work.
Slow down outgoings – Consider leasing expensive heavy machinery or technology instead of buying it outright to ease costs. Inventory control is also vital to ensure that cash isn’t tied up in slow-moving stock. This can be done by utilising forecasting to order goods just in time.
Monitoring and planning – A cash reserve is an excellent way to prevent cash flow issues by building a safety net of three to six months that covers operational costs. Checking cash flow forecasts can also allow you to spot and solve cash flow issues well in advance. Additionally, reviewing regular expenses can allow a business to cut down on unnecessary and redundant operational costs.