For small, medium, and large businesses in every sector, cashflow problems are a common frustration. Of course, cashflow problems are not just a nuisance, they can be the difference between growth and stagnation, or the success and failure of a business.

If you are not on top of your cashflow, you might find yourself in a situation where you do not have the money you need to continue running your business. Poor bookkeeping, inaccurate sales forecasting, and neglecting to monitor your finances are quick routes to financial problems, but assuming that you are on top of all that, here are the most common causes of cashflow problems and how you can prevent and/or solve them.

Problem: Inadequate cash reserves

Cash flow is the term for all of the money coming into and going out of your business, also known as the culmination of accounts receivable and accounts payable. It’s not about sales or revenue, it’s the actual, cash that is available to your business.

Most businesses try to fly too close to the wind by failing to keep enough cash in reserve, and some will not have any cash at all. This is fine if everything goes to plan and there are no unexpected emergencies, but if the pandemic has taught us anything, it is that no one can predict the future. Having a good amount of cash in the bank will give you a buffer against quiet periods or emergency situations.

While it is the most common cause of cashflow problems, it is also the simplest to solve if you have the discipline and a smart financial strategy. To prevent this kind of cashflow problem, make a budget for your current and forecasted expenses for a 3 month period. Start putting some of your revenue into a savings account on a regular basis, until you have at least that amount in reserve. Reserve funds are particularly important for businesses that experience seasonal fluctuations in their sales.

For businesses that are in need of greater liquidity sooner rather than later, a more creative approach might be needed…

1. Asset finance

Before you part with cash to invest in new assets such as machinery, furniture, an office fitout, or technology, be sure to explore asset finance as an option. Financing assets enables businesses to keep hold of their cash, spread affordable fixed payments over time, and possibly unlock significant tax benefits.

In some case you can unlock the cash tied up in assets already purchased with cash by financing them retrospectively. This releases cash that businesses can use to improve their financial liquidity and get back on the path to growth. The cost of the assets is then spread via fixed payments that are easier to budget for.

2. Cashflow loans

A commercial loan would be given over an agreed term. The funder provides the business with the cash and in return the company makes regular repayments to cover the loan and any interest. A general cashflow loan would provide the business with working capital to be used as they need to.

Secured loans would typically be against a range of assets such as property, plant and machinery, vehicles or even stock. Unsecured loans will not have such physical security but will often require personal guarantees where good personal net worth and UK home ownership are key.

3. Tax and insurance loans

Loans are also available to cover more specific business costs including settling Corporation Tax, VAT bills, self-assessment bills or even the cost of Professional Indemnity Insurance. The lender provides funds to settle the debts to HMRC so you retain the capital in your business, repaying the lender over time via affordable instalments.

Problem: Slow-paying invoices

Slow-paying invoices are another common cause of cashflow problems. Businesses that have to offer their customers 30-day to 60-day payment terms face a long wait to be paid for their services. Many businesses, however, simply cannot afford to wait that long or find that they are always delaying investments and growth.

A simple tactic is to give customers an incentive for faster payments, e.g., by applying a discount if they pay within 10 days of receiving their invoice. To make this work it is important to negotiate this with your customers ahead of time.

4. Invoice finance

Alternatively, you could turn to an invoice financing arrangement with a lender. Invoice finance helps business owners leverage their unpaid invoices, giving them an instant cash injection into the business as the lender will release up to 90% of a business’s invoices straight away. When the business’ customer pays the invoice, the lender releases the remaining 10% to the business minus their fees.

A note about bad debt: Some businesses might struggle with cashflow because clients do not pay for products or services. To reduce the likelihood of this occurring, it is good practice to only do business with clients who have a solid payment track record with your company and to insist on prior payments from new clients you are concerned about.

Problem: Too much debt

It is normal and healthy for a business to have some level of debt, but when this debt spirals out of control and your hands are tied by high repayments, it is time to reassess your situation. Businesses that are struggling with high debt levels or several separate loan repayments might consider refinancing the loan to lower the payments (e.g., extending the agreement or reducing the interest rate), or consolidating their situation with a commercial loan. A cash flow loan could also be an option for organisations looking to invest while retaining working capital.

5. Commercial loans

A commercial loan can help businesses to consolidate their debt. The loan would be given over an agreed term and would be on either a secured or unsecured basis. The funder provides the business with the cash and in return the company makes regular repayments to cover the loan and any interest.

Boosting your cashflow with bespoke financial solutions

At Bluestone, we are an award-winning team of service-focused finance professionals dedicated to our business customers and channel partners. We are specialists in creating bespoke funding solutions that deliver tax efficient growth, often including more than one finance product.

Contact us today to find out how we can help your business to move forward with a bespoke finance solution.

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Please note: This article is intended as informational rather than advisory, as it is important that you seek financial advice that is tailored to your business and sector.

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