How to prevent cash flow problems

Business cash flow management is essential, in particular for small businesses. It pays salaries and bills and allows to invest in growth. But no business is safe from unexpected cash flow problems, whether they are due to late payments, a customer insolvency or an investment not generating as much revenue as expected.

Some common cash flow problems are:

1. Lack of cash reserves
2. Borrowing at higher rates
3. Decreasing sales or lower profit margins
4. Outstanding receivables from customers
5. Uncontrolled business expansion
6. Inaccurate financial forecasting
7. Poor bookkeeping practices

In the current context, it is more important than ever to avoid cash flow issues and safeguard your money in order to protect your company growth. In this article, we share several solutions to cash flow problems.

Tracking your cash flow is essential to keep your business safe. As part of a business cash flow management, you should create a cash flow statement and make projections. By bringing all the information you have together in a cash flow statement and, separately, creating a forecast of future cash flow, you’ll be able to conduct a good cash flow analysis and have a much greater awareness of likely opportunities and potential threats. Indeed, anticipating is better than having to find solutions to cash flow problems later down the line.

It implies that you ensure to keep good records by taking the time to log company income and expenses, and keep the information timely. Having a clear picture of your company’s financial position will help you spot potential causes of cash flow issues and define how to avoid them. 

Keeping a cash buffer, like a rainy-day fund that your business can access in an emergency, can also be a good practice, in case a key machinery breaks down or a big invoice becomes overdue.

If you ask yourself “Why is cash flow important?” and want to know more on cash flow analysis, read our guide on How to make a cash flow forecast.

We often think of new business in terms of getting new customers to choose us as their goods or services provider. But when it comes to avoiding cash flow problems, it’s also important to choose the right customers.

To do so, ensuring local visibility and knowledge in the long-term is key, such as calling on local partners to gain insight and build relationships.

It’s also important to evaluate potential clients using alternative intelligence. You should dig beyond their financial ratings and look into whether their strategy and culture are in line with your own. You can also consider whether they have risk coverage and cash flow protection, like trade credit insurance. This usually indicates strong corporate governance, the ability to take smart risks and an avenue to manage potential exposure.

Carrying bad debt can quickly become burdensome and a cause of cash flow problems. Not only does it monopolise resources, but it can also hinder forecasting and the bottom line.

A way to avoid business cash flow issues  – and open to potential opportunities – 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 in two ways: implement standard conditions and payment terms. Every client 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.

Once you’ve put the proper measures in place, you should build a relationship with your principal contact within your customer’s organisation. Instead of waiting for a bill to become overdue, you can then initiate a transparent dialogue around objectives and issues management. For more tips, you can also read our article on how to maintain good customer relationship when facing unpaid invoices.

With interest rates and complex trading conditions on the rise, debt is becoming more difficult for companies to manage. Corporate collapses can prove catastrophic for unprepared small businesses in particular, and can add up to other causes of cash flow problems.

You should 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.

Sometimes you have a good business cash flow management and think you have picked the right customers to trade with, but you can’t avoid cash flow problems, it’s just the way things work. It can be difficult to predict bad debt, but cash flow protection is possible. Third-party expertise and services such as trade credit insurance provide solutions to cash flow problems by helping your business protect against credit risk, safeguarding company growth.

For more in-depth knowledge on cash flow risk management, you can download our ebook How to protect your cash flow: a guide for small and medium businesses.