Causes of cashflow issues

Cashflow problems in a business: potential causes and solutions

Below is a summary of the potential causes and solutions to cash flow problems.

This is by no means an exhaustive or detailed list but it does highlight where problems might arise and how they might be eliminated.

cashflow problems in a business

Always seek advice from an accountant when developing cashflow strategies or managing cashflow.

Causes of cashflow issues

  1. Suppliers requiring quick payments.
  2. Suppliers requiring payment up front.
  3. Buying too much stock or buying quantities of stock that are out of step with expected sales frequency.
  4. High overheads.
  5. Stock not selling fast enough.
  6. Slow paying customers.
  7. Allowing customers too much credit.
  8. Slow processing of customer payments by payment processing companies or banks.
  9. Internal slow processing of sending invoices to customers.
  10. Profits too low.
  11. Selling for turnover and not payment. Sometimes it is tempting to push stock into a customer to meet sales targets by offering bulk discount initiatives. Overfeeding customers with stock can increase cashflow pressure on that customer (meaning late payments). A fat customer also means it will not be restocking and therefore buying again for a longer time. A reseller customer may also be shy of ordering good quantities from you again given the newly formed perception of relatively bad performing sales of your products and pressure from their accounting department.

Ways to generally improve business cashflow

  1. Extended supplier payment terms.
  2. Increased stock turnaround.
  3. Lower overheads.
  4. Higher profits (margins/prices).
  5. Faster paying customers.
  6. Limiting credit to customers.
  7. Faster processing of invoices to customers.
  8. Buying just in time.
  9. Policies in place to save cash for expected dry months (see cashflow forecast).

Measures to resolve a cashflow situation

1. Bank overdraft facility

Note that you should always be confident of your exit regarding any overdraft facility.

Running a constant overdraft usually indicates room for improvement and less room to manoeuvre should you hit the unexpected.

It’s healthy to consider the use of a bank overdraft facility as a temporary measure required for positive reasons (“short term for growth” rather than “hanging in there for survival”).

If you are using a bank overdraft facility to cover late payments from customers then you are basically paying for your customers to use your cash in their business. How charitable of you.

2. Additional investment (a short-term loan from an investor or yourself)

The approach to this should be the same as the bank overdraft measure above.

3. Introduce incentives to encourage faster payment from customers (business to business)

This might be in the form of free discounts on future orders or free or enhanced additional services.

4. Threaten late paying customers with interest charges

For this to work, this clause must be in the contract and made clear prior to the point of sale. Note there is a danger of the customer relationship being tainted or the customer calling your bluff. “Charge us this and we will go elsewhere with our future orders.”

5. Limit or remove credit terms to customers or particular customers

Take note that limiting or removing credit to customers may affect sales (customers may choose to use suppliers that will offer their desired credit terms). This could mean your stock remaining on shelves (cash tied up as stuff on shelves for longer).

At least you might be passing this cashflow strain of a slow paying customer on to your competitor.

6. Tactically increase prices

Tactically increase prices of certain products with certain customers to cover the cost of late payments or even reduce sales turnover and therefore exposure to particular late paying customers of those products.

7. Use incentives to encourage extended payment terms with suppliers

But be aware of bulk discount offers freezing even more cash up in boxes.

Summary of typical cashflow situations

1. Temptation to buy stock against quantity discount rates

A business is paying large chunks of cash to suppliers for stock purchased in large amounts due to the need to reach quantity discounts. The risk is taking an action based on reaching good prices rather than aligning stock turnover with a realistic assessment of sales frequency.

2. Strict credit control on late payers

Limiting credit on late paying customers or even not doing business with late payers might be an option. Some businesses rely on a few important customers so this option is limited. All the power is with the buyer. When you find yourself in this situation, its time to develop a plan to navigate your way out of it. Take a look at the actual days your customer is paying and plan this into your cashflow forecast. Remember though that the longer a customer takes to pay, the more your business is financing their business.

3. Sales growing too quickly

Sales are rising quickly and in order to satisfy this demand, you have to buy in stock, materials, take on employees, lease large premises and equipment to cope with demand. All this is cash out.

Cash will come in from increased sales but not politely within the timescale for you to protect a cash positive situation.

Find funding to finance for growth. Remember, investors seek to have their hard-earned money productively applied to things that enable business growth: realising measured potential is their order of the day and not money spent on a “no change in circumstances situation” other than keeping something afloat.

Nevertheless, avoid where possible giving away a share in the business in order to solve this “positive” bump in the road. It is better to seek an on-going solution to cash feed rather than lose part of the business for a short-term solution.

4. Holding high stock when sales are shrinking

This is a trap that some companies can find themselves in. A competitor price initiative, a new competitor invention replacing your product or a macro change in situation such as an interest rate increase can have a sudden and substantive impact on sales. Having cash tied up in stock that is not moving is a dead-weight on the business.

Sell the stock cheaply. In other words, have an exit plan already in place to dump stock – even at a loss (a contribution to cash is better than a depreciating stock value and zero cash).

5. Low sales but high overheads

Trading at a loss will impact cash reserves and the extent and how quickly this will have an effect on cashflow will depend on the size of the business and the extent of its reserves and assets. Nevertheless, constant losses is not a good place to be. Making changes will depend on the circumstances and the reasons for the losses.

6. VAT and Tax

You can’t mess with the government. When tax is due then you had better have the cash to pay it.

Plan predicted tax payment events into your cashflow forecast then put that cash safely away and ready for payment. Never be tempted to raid the tax cash account to alleviate short-term cash issues.

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