Cash flow is integral when running a business. You need it to meet your financial commitments, pay bills and maintain stability across your operations.
If you have cash flow issues, it’s crucial to resolve them quickly. If you don’t, you will soon fall behind on payments, culminating in debt.
There’s also a danger to your productivity, with disruption stemming from an inability to pay your partners, suppliers and stakeholders. The results could be catastrophic and bring about the end of your company.
We have listed the five best ways to fix cash flow problems in your business for improved financial resilience and reduced risk.
- Manage costs
Cash flow problems typically stem from an imbalance between your costs and revenue. If your fixed overheads are too high and you aren’t bringing in sufficient gross profit to offset them, it’s likely to lead to restricted cash flow.
If you are experiencing issues, the first step should be reviewing your cost base. Conduct audits, looking at your monthly accounts to understand where you are spending money and whether this can be reduced.
Tips for lowering costs include:
- Switching to more competitively priced suppliers or utilising cheaper materials
- Ending obsolete contracts that are surplus to requirement
- Scaling down on stock holding, so you only use what you need
- Using alternative energy sources to reduce your bills
- Designing more cost-effective processes
- Outsourcing to third parties to minimise labour costs
- Combining roles, so you pay one salary rather than multiple
Any costs you remove or reduce mustn’t impact your product or service quality, as this could lead to declining sales which will worsen your cash flow.
By managing your costs effectively, you will create improved margins with the resulting cash flow gains.
- Set up credit management practices
Late customer payment affects three in five UK businesses. It’s also a driving factor for cash flow issues, with SMEs facing significant financial gaps.
If this is a recurring problem in your company, you will need to introduce stringent credit control measures. These set expectations for your customers while encouraging them to pay on time.
Credit control measures include:
- Conducting credit checks on your customers in advance so you’re aware of their reliability
- Communicating invoice due dates to customers
- Adding late payment charges to act as a deterrent for missing deadlines
- Sending invoice reminders when payment is due
- Using a third-party debt collection agency to recoup owed monies
Having thorough credit management processes should alleviate the burden of late payment if conducted correctly. This will help you to avoid cash flow blockers.
- Increase your prices
As mentioned, cash flow is the relationship between revenue and expenditure. A crucial part is a sensible pricing model that covers the cost required to provide your products and services with a healthy profit margin.
If your pricing model isn’t carefully considered and adjusted, it could lead to a cost imbalance and negative cash flow.
In the current environment with rising raw material prices and other factors, it is critical for your business to constantly review your pricing to ensure that you are maintaining your profit. Reviewing your competitors’ prices to ensure you are hitting a similar benchmark is also wise.
If you need to adjust prices, do so before it harms your cash flow.
- Seek a capital injection
Sometimes you need external support to eliminate cash flow obstacles. Fortunately, there are many solutions available on the market to help, including:
- Short-term commercial loans – giving you funding in exchange for smaller repayments
- Invoice finance – using your unpaid customer invoices as collateral for funding
- Trade finance – offering funding for supplies to close the financial gap when importing or exporting
- Stock finance – using unused stock sat in your warehouse as security for a loan
By identifying a suitable solution, you will introduce working capital into your operations that can be used to manage cash flow while facilitating productivity. Seeking support at the opportune moment prevents your cash flow situation from worsening.
- Continually audit your financial health
The mission to maintain cash flow is constant. Your financial situation will change over time as costs creep up, revenue fluctuates, and your value proposition shifts.
Due to its ever-changing nature, you must regularly monitor your company’s financial health. Doing so will enable you to maintain positive cash flow and keep control.
Review your financial accounts frequently, ideally working with a trained accountant or bookkeeper for accuracy. Aim to find areas where the cash flow is trending negatively and address it, or seek new ways to limit costs where possible.
It’s also worth reviewing your contracts with suppliers to ensure they remain cost-efficient or if you would be better off switching to an alternative agreement at a lower price.
If you are experiencing cash flow difficulties and aren’t sure how to move forward, speak with one of our advisors. They will identify the root causes, find appropriate solutions, and connect you to financial support that improves the situation.