Cash flow problems: What are they and how to fix them (2024)

29th May 2024

Negative Cash Flow

Negative cash flow occurs when a business’s total cash inflows are less than its total cash outflows over a specific period. In other words, the company is spending more money than it generates.

The Solution:

• Increase sales and revenue
• Reduce expenses
• Collect payments from customers faster
• Manage your inventory more efficiently
• Make sure you pay bills on time to avoid penalties

Delays in Receiving Payments from Customers

Late customer payments are a problem every small business owner knows well. In fact, recent data by Xero found that small businesses wait an average of 29.5 days to be paid.

The Solution:

1. Establish clear payment terms and communicate them to your customers upfront.
2. Implement a consistent invoicing process.
3. Offer multiple payment options.
4. Monitor accounts receivable regularly and follow up on overdue payments proactively.
5. Consider offering early payment discounts.
6. Assess the creditworthiness of new customers and set appropriate credit limits.
7. Explore invoice financing or factoring to accelerate cash inflows.

Overreliance on a Small Number of Customers

Dependence on a few key customers makes a company highly vulnerable to cash flow disruptions if one of those customers experiences financial difficulties or stops working with you.

The Solution:

1. Actively seek to diversify your customer base and target new market segments.
2. Regularly assess the financial health and stability of key customers.
3. Establish a clear credit policy and monitor customer credit risk closely.

Holding Too Much Inventory

Overstocking inventory is one of the most common ways companies tie up working capital and negatively impact cash flow.

The Solution:

1. Implement an inventory tracking and management system.
2. Regularly review and analyse inventory turnover rates and identify slow-moving items.
3. Use data-driven forecasting methods to predict demand and avoid overstocking.
4. Consider adopting just-in-time (JIT) inventory management techniques.
5. Regularly assess and adjust reorder points and safety stock levels.
6. Explore opportunities to reduce lead times and improve supply chain efficiency.

Uncontrolled Expenses

When expenses grow disproportionately to revenue or aren’t aligned with budgets, it can significantly impact a company’s liquidity.

This might mean your overhead costs are too high, employee spending isn’t monitored, or there are inefficient processes somewhere in the business.

The Solution:

My advice is to implement a multifaceted approach to tackling uncontrolled expenses. Some ideas here might include establishing clear expense policies for staff and conducting a thorough analysis of what’s being spent where. By making targeted cost-reduction initiatives throughout the company you can start to create a cost-conscious culture.

Overinvestment in Fixed Assets

Overinvestment in fixed assets occurs when a company allocates excessive capital to long-term assets, such as property, plant, and equipment, without generating sufficient returns. This can strain cash flow, as the upfront costs are high and the payback period is often lengthy.

The Solution:

This is a difficult scenario to fix once it’s occurred; preventing overinvestment involves doing thorough feasibility studies before committing to significant investments. You should also regularly monitor the performance of fixed assets and compare actual results against budgeted targets.

Inadequate Financing

Inadequate financing refers to a situation where a company lacks sufficient access to capital, either through internal resources or external funding sources, to meet its operational and strategic needs. Naturally, this hinders growth and increases financial risk.

The Solution:

The best course of action is to strengthen the balance sheet by reducing debt levels while improving working capital management. The more cash reserves you build, the more financially resilient you’ll be.

Seasonal or Cyclical Fluctuations

Many industries, such as retail, tourism, and agriculture, experience significant seasonal patterns, with peaks and troughs in demand that hugely impact cash flow.

In these scenarios, companies struggle to generate sufficient income during slow periods. Conversely, during peak seasons, working capital is strained as companies ramp up production or inventory to meet increased demand.

The Solution:

As ever, prevention is the best cure. My advice is to develop accurate cash flow forecasts that account for the expected patterns of revenue and expenses throughout the year or cycle. By anticipating cash flow needs in advance, you can plan accordingly and take steps to smooth out the peaks and troughs.

Rapid Growth or Overexpansion

Rapid growth or overexpansion occurs when a company experiences a marked increase in business activity within a short period, often outpacing its ability to manage the associated costs.

As a company scales up, it typically needs to invest heavily in new infrastructure, inventory, personnel, or marketing to support the increased demand. These investments often require significant upfront cash outlays.

The Solution:

Good financial management is key here. Adopt detailed cash flow projections and identify the expected sources and uses of cash over time to manage the cash flow challenges.

Implementing solid financial controls and systems is also crucial. This may involve upgrading accounting software, automating financial processes, or hiring additional financial staff to ensure accurate and timely financial reporting.

High Debt Obligations

When a company carries excessive debt, a large portion of its cash inflows gets funnelled into servicing interest payments and principal repayments. This limits your ability to invest in growth opportunities or respond to unexpected challenges.

The Solution:

1. Create a detailed debt management plan outlining obligations, repayment schedules, and cash flow projections. Identify opportunities to restructure, negotiate terms, or consolidate debts.
2. Prioritise debt repayment, focusing on high-interest or short-term debts first. Consider a debt snowball or avalanche strategy to systematically reduce debt levels.
3. Improve operational efficiency and profitability by increasing revenue, reducing costs, streamlining processes, and renegotiating supplier contracts.

Inadequate Cash Reserves

When a company has insufficient cash reserves, it can’t respond to sudden changes in market conditions or operational disruptions. This can lead to liquidity crises, missed growth opportunities, or even insolvency.

The Solution:

1. Establish a cash reserve policy outlining target reserve levels based on the company’s risk profile and objectives.
2. Regularly forecast and update cash flows to identify and address potential shortfalls proactively.
3. Optimise working capital by monitoring key metrics and freeing up cash tied up in operations.
4. Set cash flow targets, align incentives, and foster a cash-conscious culture across the organisation.
5. Secure access to diverse financing options.
6. Develop and regularly update contingency plans for potential crises.

What types of outside funding can a company seek to overcome cash flow problems?

When should I seek professional help for cash flow problems?

You should consider seeking professional help for cash flow problems in the following situations:

1. Persistent negative cash flow over several months despite efforts to increase revenue and reduce expenses.
2. Difficulty meeting financial obligations, such as paying bills, salaries, or debts on time.
3. Rapid growth or unexpected challenges that strain your cash flow, such as losing a major customer or facing a significant market shift.
4. Lack of financial expertise or resources within your company to effectively address cash flow issues.
5. Inability to secure financing or access additional capital to support your cash flow needs.
6. Deteriorating relationships with suppliers, creditors, or employees due to late or missed payments.
7. Concerns about the long-term viability of your business model or financial strategy.