Positive cash flow is key to business success. Even a profitable business can experience cash flow problems. If a business is experiencing cash flow difficulties then it will not be able to meet the liabilities that fall due including suppliers’ invoices.
In one of our recent News articles we reported that without exception, every European country polled by Atradius in 2020 saw an increase in late payments for B2B trade. The expectation is for this trend to continue, particularly as government support during the pandemic is phased out. Here we explore the causes of cash flow problems.
One of the most common strains on cash flow is late payment by a customer. If a customer does not pay on time then this can have a knock on effect and result in your company being unable to meet its own payment commitments. You then may be forced to pay your suppliers late.
If you are struggling to collect a late payment then you can enlist the services of a debt collection agency.
A bad debt is where a customer does not pay your company for goods delivered or services rendered. This is a risk faced by businesses trading on credit terms with their customers and a threat to your company’s cash flow. As a debt ages the likelihood of payment reduces so it is important to have good credit control in place to chase these debts.
To protect against the risk of bad debts you can purchase credit insurance policy to transfer the risk of non-payment to a specialist insurer.
If a business borrows too much money in the form of loans and does not have sufficient profit to repay the debt then this will cause financial problems in the future. A funding facility should be reviewed regularly as your business changes. A correctly structured finance facility can do more than just solve cash flow problems for a business. With options including credit control and debtor protection there are additional business benefits to reviewing your finance facility.
Company Losses or Low Profits
One of the major sources of cash for a business are the profits. There is a link between companies which have low profits or those which are unprofitable and poor cash flow. An unprofitable business will eventually run out of cash to cover outgoings.
The Economic Cycle
The pandemic has demonstrated how unexpected shocks to the economic cycle can have drastic effects on consumer demand, trade and the supply chain. Over the last 12 months these factors have drastically affected demand for some businesses. This instantly impacted their ability to meet payment commitments. Changes to the economy, sectors or industries can all cause unexpected decline in sales and a knock on effect on cash flow.
Seasonal fluctuations in businesses are common depending on the industry the business is in. To ensure positive cash flow all year round, businesses need to know the seasonal fluctuations and plan for the imbalances with cash reserves or a finance facility.
Overtrading presents a strain for short term finance if a business is expanding too quickly. There are usually large up front outlays required to expand a business, if demand has not caught up with this expansion yet then this will negatively impact a businesses cash flow.
Poor Financial Planning
Businesses should carry out a cash flow forecast and budget to ensure you stick to a positive cash flow business model. Have in place balance sheets, profit and loss statements and cash flow statements. Forecasts will also help to keep the business on track. Good financial planning will allow you to forecast cash flow problems ahead of time. Measures can be taken to resolve these shortages before they become a problem.
Too Much Stock
A business needs to hold enough stock to meet demand but holding excessive inventory will tie up cash in the business and occupy warehouse space. If this stock is held for too long then a business risks the stock becoming out of date and unsellable, impacting profit. If your business ends up with excess stock and cash that it needs to access then stock finance can release some of this working capital. In our next article we will look at steps that your business can take to avoid late payments from customers.