Cash flow is the term used for the incomings and outgoings of a business over a certain period.
It’s essentially the movement of money in and out of a company’s bank accounts. When your cash flow is healthy, it means there’s a consistent stream of income to cover your business’s financial obligations, like paying suppliers, repaying debt, or settling invoices on time. A strong cash flow position helps maintain good relationships with creditors, supports day-to-day operations, and keeps your business financially stable.
However, if your company’s cash flow becomes poor—perhaps due to late payments from customers or mounting bills, it can become difficult to meet your liabilities as they fall due. This is one of the first red flags that your business may be approaching cash flow insolvency.
Cash flow insolvency occurs when a company is unable to pay its debts on time, even if it may appear solvent on the balance sheet. In other words, your business might have assets on paper, but if there isn’t enough accessible cash to meet urgent obligations, it may be deemed insolvent under the cash flow test.
Persistent late payments, pressure from creditors, or defaulting on financial agreements can quickly escalate into formal insolvency or even liquidation proceedings.
That’s why monitoring your cash flow and acting early is vital to avoiding further financial distress.
The Cash Flow Conundrum
Proper company cash flow management is a key strategy that every business owner must master for long-term financial success. However, managing cash flow can be one of the biggest challenges business owners face - and even profitable companies can experience cash flow problems.
In fact, a recent study found that 61% of small businesses around the world struggle with cash flow, with nearly one-third of those surveyed unable to either pay vendors, pay pending loans, or pay themselves or their employees due to cash flow issues.
So, if you are struggling with your cash flow, you’re not alone.
Common Causes a Company May Have Cash Flow Problems
There are several things that can cause cash flow problems, however, most typically, these include:
- Poor financial record keeping and ineffective cash flow management
- Over financing your business
- Seasonal highs and lows
- Late creation of invoices
- Late payments
- Agreeing to high-interest loans
- Declining sales
- Unexpected bills or refund requests
- An over-reliance on a small number of customers
- High overheads
- Poor credit control procedures
- Extending too long a line of credit
How to Prevent Cash Flow Problems
But all is not lost! If your business is facing cash flow problems, there are a number of different tactics you can use to prevent and solve cash flow issues so you can turn things around.
From cutting costs and raising prices to improving your invoice system and even seeking professional help, here are our 10 top tips:
1. Understand Your Cash Flow to Prevent Insolvency
If you want to get your cash flow back to being healthy again, you need to be in complete control of your finances.
You’ll need to know your cash flow inside out and review it daily so you can keep a close eye on any incomings and outgoings; this way, if you see trouble ahead, you can put a plan in place to manage the situation and turn things around.
The first step is to get to grips on when your cash is entering and leaving your business bank account. After all, if you’ve been flying blind and paying bills or invoices as they come, you won’t have a sense of what’s causing your cash flow crisis.
2. Create a Cash Flow Forecast to Avoid Shortfalls
Once you’ve got a good grip on your finances, you need to create a cash flow forecast. Prevention is better than cure - and there’s no better way to solve a cash flow problem than to prevent a shortfall in the first place.
By creating a cash flow forecast, you can estimate the amount of money you expect to flow in and out of your business and when, so you can know in advance how much cash your business will need in the coming months.
By planning ahead, if you are expecting a seasonal dip in sales or know that you’ve got a big one-off payment coming up, you can start making the necessary precautions now to make sure there’s no negative impact on your business.
Regular forecasting helps you manage your cash flow and balance sheet together, ensuring that short-term cash needs don’t jeopardise your long-term financial position.
3. Secure a Flexible Line of Credit for Cash Flow Stability
As part of your planning ahead strategy, you should have access to a flexible line of credit. This means you can have quick access to funds as and when required in case you need to ride out a cash flow storm.
Short-term business loans, company credit cards and overdraft facilities are all potential ways to access cash quickly - just make sure you find the right source of finances that’s right for your company and ensure that you can easily afford the interest charges so you don’t put any additional strain on your business.
4. Set Clear Payment Terms
To prevent invoice issues and cash flow struggles further down the line, it’s really important to set out clear payment terms with your clients from the beginning.
From the very outset, make it clear what your payment terms are, including how much the client will be required to pay, how often and the date you require payment.
You should also introduce late payment charges if you haven’t done so already. Make the late payment clause as clear as possible, stating when the late payment fees will be issued and how much the charge will be.
These terms should be as specific as possible and your prospective client should understand them in full and agree to them, by signing the terms, before any work commences or any products are placed on order.
5. Strengthen Your Invoicing System to Get Paid Faster
The quicker you invoice, the quicker you get paid - it’s as simple as that! So, make sure your invoicing system runs as smoothly as possible - and make sure you keep on top of payments due, too. Late payments are an increasingly common problem for businesses in the UK.
In fact, a recent study conducted by Experian found that one in five firms are currently owed more than £25,000, and one in ten firms are owed more than £100,000. So, it’s really important to make sure your invoicing process is as efficient as possible.
Send invoices as soon as orders have been fulfilled, make sure you address the invoice to the right person, check your invoices carefully to make sure there are no mistakes - and don’t be afraid to chase payments!
The day after the payment is due, remind your customer that they need to pay via email. Then phone every day until you get paid.
6. Use Invoice Factoring or Discounting to Boost Cash Flow
Another option if you are struggling with cash flow is to use invoice factoring or discounting.
Invoice discounting is a process whereby a company raises money against invoices through a financial institution, whereas factoring is where a company sells its invoices to a funder or bank.
Both are very powerful business tools where you essentially raise money from your debtor ledger.
The lender will look at your invoices, customer base, and your overall business, and decide how much to lend based on the quality of their risk.
They will then provide you with working capital advances against that asset - which can be up to 90% of the invoice value, although 75%-80% is the norm. Usually, all of your future invoices will pass through the system, which significantly improves cash flow.
The finance company will set up a new bank account in your company’s name to collect customer payments, and you will then be allowed to ‘draw down’ those funds when they have cleared.
This is an excellent solution for small businesses because it can help the company grow, it is relatively inexpensive and the risk is low. Check out this blog to find out more.
7. Cut Business Costs Without Compromising Operations
If you’ve noticed a cash flow problem in your business, the most obvious thing to do to try and improve the situation is to cut costs. However, it’s important to carefully consider which costs to cut - don’t just cut away at everything and hope for the best!
Look at each expense and question it - are any expenses not essential? Are your staff doing too much overtime? Could you move to a cheaper location where rents aren’t as high? Can your suppliers offer you a better deal to help you save money?
There are always ways to cut costs - for more advice, make sure you read this blog.
8. Raise Prices Strategically to Strengthen Cash Flow
After cutting costs, the next best way to improve your cash flow is to raise your prices. Are you charging enough for your services? If not, it might be time to put up your prices.
However, it’s important to assess the situation thoroughly beforehand: what effect would an increase in prices have on your customers? If a price increase would push your customers away, is it worth it?
Make sure you weigh up the pros and cons before pushing up your prices - after all, you don’t want to drive your customers into the waiting arms of your competitors!
9. Speak to Suppliers Early if You’re Struggling to Pay
If you’re struggling with cash flow, it’s really important to be open and honest with your suppliers. Don’t allow red letters to multiply; instead, offer to pay something on account until you get your cash flow situation sorted and you can pay the whole amount off.
If this isn’t done, you could end up facing legal action for non-payment or even become personally liable, so it’s vital that you don’t bury your head in the sand.
10. Get Expert Advice from a Cash Flow Specialist
Finally, if you are experiencing regular company cash flow problems that are making it difficult to make payments, it’s important to seek expert advice to turn things around.
Ongoing cash flow struggles could mean your business is on the brink of insolvency, so you need to act fast. Once your business is insolvent, you must legally prioritise the interest of your creditors - so, it’s vital that you turn things around before it’s too late.
At McAlister & Co, our team of licenced Insolvency Practitioners help businesses to navigate through financial hardship and insolvency. If you’re looking to find an insolvency practitioner you can trust, or If you have any concerns about the health and viability of your business, don’t hesitate to contact us. 