4 solutions to business cash flow problems

Small businesses are, by nature, more susceptible to cash flow challenges. Here, we’ve compiled a few common causes and effects of cash flow problems.

Back in 2021, the construction sector faced staunch challenges from the rising costs of raw materials. These challenges were impacted by the COVID-19 pandemic, which impacted  product availability and increased prices of timber and plaster.

While this situation has improved since then, the point remains: escalating or fluctuating material costs can hurt a business’s cash flow by straining available funds.

Read more: Cash flow issues in business: Rising cost of materials

Tracking cash flow is essential to keeping your business safe. As part of good cash flow management, you should create a cash flow statement and make projections. By compiling your financials in a cash flow statement and creating a cash flow forecast, you’ll be able to conduct a cash flow analysis. This will help you gain greater awareness of likely opportunities as well as potential threats – including unexpected cost increases.

Taking the time to log company income and expenses, and keeping the information updated, will give you a clear picture of your company’s financial position. This way, you can spot issues more easily and better avoid cash flow problems.

Keeping a cash buffer, like a rainy-day fund, that your business can access in an emergency can also be a good practice.

Back in 2021, the construction sector faced staunch challenges from the rising costs of raw materials. These challenges were impacted by the COVID-19 pandemic, which impacted  product availability and increased prices of timber and plaster.

While this situation has improved since then, the point remains: escalating or fluctuating material costs can hurt a business’s cash flow by straining available funds.

Read more: Cash flow issues in business: Rising cost of materials

Delivering a product or service takes time, and there are always costs involved. When a customer fails to meet their end of the deal, either on time or altogether, your cash flow can become severely impacted.

Without the ability to recuperate costs directly from a customer, you may have to explore other avenues to ensure services or cash flow aren’t adversely impacted.

Read more: Late payments: how to collect and avoid them

To some, new business means getting new customers to choose them as their goods or services provider. But when it comes to preventing cash flow problems, it’s also important for a business to choose the right customers.

However, choosing the right customer is much more than selecting the right credit profile; you should also evaluate potential clients using alternative methods. This could means looking beyond their financial ratings and investigating whether their strategy and culture are in line with your own.

Consider also whether potential customers have risk coverage and cash flow protection, like trade credit insurance. This usually indicates that they have strong corporate governance, the ability to take smart risks, and a way to manage potential exposure.

Failing to pay can sometimes be an early warning sign of a customer becoming insolvent.

If this happens, you could be severely impacted. This may also leave you with little opportunity to reclaim any unpaid invoices, which can also have drastic impacts on cash flow.

With interest rates and complex trading conditions on the rise, debt is becoming more difficult for companies to manage. According to Allianz Trade, global business insolvencies should rise by +6% in 2025 and +3% in 2026, following a +10% rise in 2024. Corporate collapses can be especially catastrophic for unprepared small businesses.

Ensure you understand your market by equipping yourself with data on business contexts, collection practices, and the legal system, especially if you’re dealing with a customer in a foreign market.

Here are four steps to protect your business against customer insolvency:

1. Analyse continuously: Ensure you have the data to make informed credit decisions.
2. Exercise caution: Know how to identify early warning signs of insolvency so you can manage customer debt proactively.
3. Understand your customer: Become familiar with the political and legal systems in your market and ensure you adhere to local regulations.
4. Have a plan B: Contingency planning is key. This is most effective at the local level and should include plans for handling insolvency risk.

Most businesses require some sort of credit or borrowing to grow, whether funding expansion or covering related costs.

Thus it’s important to accurately balance the amount of debt a business should take on. Too much debt and a business can start to fall short, which has a direct effect on cash flow – both for the borrower and the lender.

Carrying debt can become burdensome. Not only does it monopolise resources, but it can also hinder forecasting and your bottom line. A potential solution to cash flow problems is to adopt a forward-looking strategy for minimising debt.

It all boils down to ensuring you have defined – and provided your customers with – the right information. First, set yourself up for success by implementing standard terms and conditions. Each customer should be aware of this agreement, including any penalties for late payment, from the onset of the relationship. Next, proactively decide when it makes financial sense to chase down an unpaid invoice.

The burden of proof is on you, and there are considerable costs associated, so knowing your ‘tipping point’ will save resources in the long term. Instead of waiting for a bill to become overdue, you can initiate a transparent dialogue around objectives and issues management.

For more tips on managing customer payments, you can read our article on how to maintain good customer relationships when facing unpaid invoices, and our piece outlining tips on what to do when your customer doesn’t pay.

Even if you have good cash flow management and have picked trustworthy customers, it’s impossible to avoid cash flow problems completely.

It can be difficult to predict bad debt. That’s why third-party solutions to cash flow problems, such as trade credit insurance, can help your business protect against credit risk, safeguarding company growth.