CASH FLOW PROBLEMS

Problems we solve ~ Cash Flow ...

Ever heard the saying "Profit is vanity but Cash Flow is reality"?

 What are cash flow problems?

What are cash flow problems, what causes cash flow problems and the effects on your business? Cash flow problems happen when the money or cash coming into your business is less than the money needed to go out to pay your staff and pay your bills i.e. the people you owe money to like your suppliers, banks etc.. The statistics vary depending on which report you read but approximately 57% of businesses suffer from cash flow problems,  with 38% failing because of insufficient funds to keep trading (CBInsights 2021). Cash flow problems are the single biggest reason for business failures, so it's important to understand the causes of cash flow problems and their effects on your business.

What are the potential effects of cash flow problems on your business? 

  • Ultimately your business would have to close down. If you run out of money you can't continue to trade.
  • If you can't pay your suppliers on time, this will put a great strain on your relationship with them. They may decide to stop supplying you altogether, at least until you've paid for the supplies they've delivered. They may set harsher credit and payment terms adding more pressure to your cash flow woes. They will almost certainly be less accommodating with your business compared to their other customers - potentially your competitors.
  • If you can't pay your employees on time, they'll feel demoralised, under valued, and pretty soon question their future in your business and start looking for new jobs. Your financial problems will have a huge impact on their own financial position. The costs associated with replacing and training new staff could easily be the trigger that tips your business over the edge.
  • If you are late or miss debt repayments your bank or financial provider will very soon come knocking on your door. Your credit rating will suffer, making future borrowing more expensive and harder to come by, as you will be seen as a risky proposition.
  • You may well have to dip into your own pocket to bail your company out. If you can't raise money any other way, then your own personal funds or loans from family or friends may be your only recourse. Even if you don't need to raid your own personal savings, banks and financiers will ask you to put up security on loans such as your family home.
  • Missed opportunities and a brake on growth. If you can't buy stock or supplies to fulfill new orders or don't have the funds to invest in new products, machinery, technology or marketing, the growth of your business ill be severely hampered. 


What causes Cash Flow Problems?

The causes of cash flow problems that are within your immediate control and you need to get a grip on today, and sort out.

Seasonal Fluctuations

Businesses that experience seasonal variations in sales often encounter cash flow challenges. During slow periods, such as off-peak seasons or holidays, revenues may decrease significantly, while fixed expenses remain constant. This imbalance can strain a business's cash reserves, making it difficult to cover ongoing expenses and leading to cash flow problems.

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Overstocking

Maintaining excessive stock levels can tie up working capital and contribute to cashflow constraints. When businesses hold more stock than necessary, it restricts the availability of cash for other essential operations. Slow-moving or obsolete stock can be particularly detrimental as it hinders the generation of cash inflows and increases storage and maintenance costs. We often tell clients that stock is a cost not an asset and that they should not fall in love with their stock.

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Inadequate Financial Planning

A lack of accurate forecasting and financial planning can lead to cash flow problems. Without a clear understanding of upcoming expenses, income projections, and anticipated cash inflows, businesses may find themselves unprepared for unexpected financial challenges. Inadequate financial planning can result in cash flow gaps, where the outflow of funds exceeds the inflow, putting the business at risk.

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Cash Flow Mismanagement

Poor financial management practices, including excessive spending, uncontrolled expenses, buying fixed assets out of working capital and a lack of cash flow monitoring, can exacerbate cash flow problems. Failing to regularly track and analyse cash inflows and outflows can result in cash shortages and an inability to meet financial obligations.

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Poor Credit Control Processes

Poor management of debt collection can result in delayed or even uncollected payments from customers. Inadequate credit policies, lax follow-up on outstanding invoices, and ineffective collection practices can hinder cash flow and create liquidity issues.

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High Debt Burden

Excessive borrowing obligations, such as loan repayments or other high-interest payments, can strain a business's cash flow. The need to allocate a significant portion of available funds to debt servicing limits the amount of cash available for day-to-day operations and other essential expenditure. Taking advantage of easily obtained and cheap credit may seem a good idea to keep a business going but it exacerbates the issues further down the line when you may be forced to accept harsh repayment terms at a time when profits are insufficient to generate the cash to cover the repayments.

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Unexpected Expenses

Unforeseen expenses, such as equipment repairs, legal disputes, or sudden regulatory changes, can significantly impact a business's cash flow. Without sufficient reserves or contingency plans, unexpected financial burdens can create cash flow gaps and put pressure on the business's finances.

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Inaccurate Pricing Strategies

Setting prices too low or failing to account for all costs associated with product or service offerings can erode profit margins and limit cash flow. Inadequate pricing strategies can lead to revenue shortfalls, making it challenging to cover expenses and invest in business growth.

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Inadequate Working Capital

Insufficient working capital, which represents the funds available to cover day-to-day operations, can lead to cash flow issues. Without an appropriate cushion of liquid assets, businesses may struggle to meet immediate financial obligations, pay suppliers, or take advantage of growth opportunities. Too many businesses are spending all of their profits they are making today rather than “saving for a rainy day”. Inadequate working capital is actually inadequate cash retention.

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And our dedicated web page >> Raising Financing Solutions

Delayed Payments

One of the primary causes of cash flow problems is delayed payments from customers. When invoices are not settled on time, businesses face difficulties in meeting their own financial obligations. This delay in cash inflow disrupts the cash flow cycle, affecting the ability to pay suppliers, employees, and other expenses. If you are doing business with very large customers, they will often impose their terms and conditions on you rather than you being able to impose your terms and conditions on them. You may want to be paid in 30 days but large corporates will often demand 90 or even 120 days of credit before they will pay. They know that if you rely on their custom you will have no choice but to comply.

Wood and Disney have the answer

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Macro causes of Cash Flow Problems

Now, what about the macro causes of cash flow problems over which we have limited direct control ...

Economic Downturns

During periods of economic recession or downturn, businesses may experience a decline in sales and overall demand. Reduced consumer spending can lead to cash flow challenges as businesses struggle to generate sufficient revenue to cover expenses and maintain operations. Recessions occur every ten years or so and therefore we should be prepared for them even if we cannot stop them from happening.

Changes in Market Conditions

Shifts in market dynamics, such as increased competition, changing consumer preferences, or technological advancements, can impact a business's cash flow. Failure to adapt to market changes swiftly and effectively can result in declining sales, reduced profitability, and cash flow difficulties. The term “working in the business rather than on it” will often leave business owners blind to impending changes. By the time they realise something has changed it is often too late to do anything about it.

Legal or Regulatory Compliance Costs

Compliance with new or changing laws and regulations can impose additional financial burdens on businesses. Costs associated with regulatory requirements, licenses, permits, or legal fees can strain cash flow, especially for small businesses with limited resources. Something which is acceptable and legal today may become more strictly regulated or even illegal tomorrow.

Macro causes such as the above are often the most difficult for business owners to foresee and plan for. 

That's why it's so important to have on board, experienced, professional advisors like Wood and Disney who can help you to build a cash reserve in your business to make your business resilient and to support growth. Wood and Disney have developed The Strategic Cash Retention Programme ® to build cash reserves to see you through the hard times, unforeseen challenges and to support your future growth.


Cash Flow Problems are one of the biggest causes of Business Failure

 

Cash flow problems can significantly impact a business's financial health and operational capabilities. By identifying the causes behind these challenges, businesses can take proactive steps to address them. It's important to remember that each business may face unique cash flow challenges based on its industry, size, and specific circumstances. By identifying and addressing these causes, businesses can develop strategies to mitigate cash flow problems and improve their financial stability.


Now take a look at our solutions to your cash flow problems

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