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Cash Flow Problems and How to Avoid Them

Estimated Read Time: 6 Minutes

JESSICA LAMBERT , 26 January, 2023

Cash flow problems are the single biggest problem for businesses, both new and old alike. In the world of business, cash is king and without it, companies of any size struggle to keep their doors open.

Maintaining healthy cash flow is a hugely important aspect of running a successful business and yet it is something so many businesses find difficult. That is certainly the case for start ups and SMEs who don’t have massive cash reserves to support them should any financial obstacles suddenly arise.

Whilst the majority of SMEs encounter a cash flow problem at some point during its lifespan, only a proportion of those manage to overcome it, which offers some understanding as to why 12% of businesses ceased trading altogether in 2017 alone – a figure that remains so high year on year.

However, the most frustrating part of all is that most cash flow problems can actually be prevented with some forward thinking, preparation and the right strategy in place. Understanding exactly how cash flow problems arise is the first step and as a result, your business can then undertake any steps necessary to ensure those problems are addressed before any drastic action is required. Our team have put together the leading reasons behind cash flow problems so you can comfortably predict them and take precautionary measures to avoid the outcome altogether.

Long Payment Terms and Late Invoices

This is perhaps the biggest problem businesses face and that is especially the case with SMEs who don’t always have the financial backing needed to balance out the financial issues caused by late payments. In fact, late payments are a problem for almost a third of SMEs.

Unpaid invoices are commonplace in the world of business, with it costing UK SMEs a whopping £67 billion so far. Sadly, payments have become a waiting game for many companies and this problem causes a vicious cycle that continues to affect businesses on a consistent basis.

The Solution:Invoice Finance

This funding product is one of the most popular alternative finance solutions out there and it is utilised by thousands of businesses year on year. The popularity of this type of funding has surged to record high levels in recent years, with the balance of pure invoice finance borrowing reaching almost £19 billion at the end of 2017.

Rather than chasing late payments or trying to operate efficiently with low funds due to 60-day payment terms, apply for our Invoice Finance loan today.  Your debtor book is likely your biggest company asset, so use it for business growth, to enhance cash flow and to combat issues caused by late payments.

With the Nucleus Invoice Finance facility, SMEs can borrow between £100k and £50m and to guide you through the entire process, we provide a dedicated relationship manager.

Inadequate Gross Margins

When it comes to the overarching financials involved in running a business, it is ultimately a very simple equation. Inflows of the business need to exceed outflows, otherwise a cash flow crisis will occur and your company may well start to struggle financially.

For SMEs and start ups operating in a highly competitive market, having the right pricing strategy in place is an essential your business simply cannot afford to miss. The mistake many new and smaller businesses make is trying to drop their process lower than everyone else – often, without consulting the all-inclusive cost of providing the product or service.

The Solution: A Well-Researched Pricing Strategy

The way to solve inadequate gross margins is to fine tune your pricing strategy so that it reflects the true cost of delivering the products or services your SME provides. Whilst competitor analysis is important when establishing a reasonable price, it is important to remember that each business will have their own prices negotiated with suppliers and sometimes, your competitors manage to land better deals than you do.

Once you have worked out the all-inclusive cost, you will then have exactly what you need to better price your products and services. For some items, that might mean raising prices to further diminish weak margins that are impacting on the overall profit of your company. For others, it might mean removing them from your offering as a business altogether.

A Lack of Planning

As we previously mentioned, the majority of cash flow problems can be avoided with some forward thinking and adequate planning. The obstacle most SMEs are faced with is not necessarily the reason for the cash flow issue itself, but how to overcome it before it snowballs into something a lot more serious.

Failing to plan ahead will eventually impact your business and this will likely result in a hit to your finances. By planning months or even a year or two in advance, you can create a blueprint to success for your business to follow and this should allow your SME to stay one step ahead of any possible cash flow issues.

The Solution: Cash Flow Forecasting

Regular – and most importantly, accurate cash flow forecasting will enable your business to make sound financial judgements to protect the future of your SME. Understanding how to prepare a cash flow forecast is a crucial skill any business owner should have in their arsenal and with such a document, you also stand a far better chance at attaining additional funding for your company.

Overhead Expenses That Are Way Too High

For SMEs hoping to achieve growth, getting to grips with overheads should be at the top of any priority list. A failure to reduce overhead expenses where possible will likely stunt any real chance of expansion and it is often where newer businesses get it wrong.

If you are not all too familiar with overheads, a simple way to think about it is any cost involved with running your business that is not linked directly to selling your services or products.

Solution: An Audit Is Well Overdue 

Reducing overhead costs can be a little tricky, especially for those who are not seasoned pros at controlling large budgets. The first place to start is by auditing every single expense in your business and then refine that list as much as possible.

If the rent for your warehouse is eating into your profit, consider downsizing if possible or moving to a cheaper location. Try to renegotiate better contracts for utility bills and be frugal with travel expenses too.

Avoiding a cash flow crisis altogether is not always an easy task, but it is certainly within reach for most businesses providing products or services that are in demand, which is again an important component of running a thriving business. Maintaining healthy cash flow should be at the forefront of every business owner’s mind and if you predict problems for the financial state of your SME, exploring your funding options is key.

Our Cash Flow Finance is a hassle-free, unsecured commercial loan of up to £150k, with terms ranging between 3 months and 3 years. For businesses needing a cash flow boost, this provides the perfect funding solution.

For more small business advice and tips, read our related posts below. If you are experiencing cash flow challenges or want to realise your business growth plans, get in touch with our team of Funding Specialists today on 020 7839 9451 or email [email protected].





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