5 common causes of poor cash flow

05/08/2020

Poor cash flow can have a knock-on effect to every area of the business, and there are many things that can cause a business to run into these issues.

Although it’s impossible to completely prevent shocks to your cash flow, being aware of the main pitfalls can help you make informed decisions and foresee potential issues.

Here are 5 common causes of poor cash flow that are worth being aware of and protecting against where possible.

High running costs

For some businesses in particular, running costs will always be high, and this can be particularly problematic for small or growing businesses.

While there will always be overheads that have to be paid, reviewing your running costs regularly can help you stay on top of them and make sure you are operating as cost-efficiently as possible.

For instance, can savings be made on utilities such as electricity and broadband, or even on office space? In some cases, it can be worthwhile investing in new software and assets to reduce overheads in the long term.

Over investing

While investing at the right time can be a great thing for many businesses, it’s important to revisit your cash flow forecast before you do so and make an informed decision.

Unexpected expenses can hit at any time, so it can be risky losing your cash buffer in order to invest – particularly if that investment can be delayed.

Expanding too fast

For small businesses in particular, all growth is seen as a positive, but many businesses fall into the trap of expanding too fast and create ongoing problems in their business.

While it may seem okay to take a temporary cash flow hit in order to take on more business, expand your offering or invest in new assets or premises, it leaves you incredibly vulnerable should something unexpected happen.

‘Chasing turnover’ is a particular threat to businesses, as taking on too many orders without sufficient cash flow to satisfy them – especially when trading on credit terms – can have a significant impact on cash flow.

Expansion should therefore be taken one step at a time. While it’s great to take advantage of opportunities when they arise, be sure to keep a close eye on your business forecasts and past metrics.

Late payments/ bad debt

When an invoice goes unpaid, it can be frustrating, stressful and incredibly damaging to your business. It may seem that there is not much you can do to prevent this, as you are relying on your customers to pay on time, but there are steps you can take to help.

The first step is perfecting your own credit control process, from the moment the invoice is issued to the date it is due. Keeping in constant contact with your customer can be a good way to keep your invoice front to mind and avoid any issues arising.

If an invoice does become overdue, it’s important to act quickly. For help on managing your credit control in-house, take a look at our credit management handbook.

If you are struggling to recover an invoice, contacting a debt collection agency as soon as possible can give you the best chance of success whilst removing the time and resource burden on your business.

Unforeseen expenses

Unforeseen expenses are often the straw that breaks the camel’s back when it comes to cash flow.

There is no way to completely avoid these setbacks, however there are things you can do to prepare for them.

It’s important to always ensure you have a cash reserve that’s set aside for emergencies, and also to regularly update and review cash flow forecasts.

If you’re struggling with unpaid invoices, we can help. Get in touch on 0800 9774848 or request a call back from a member of our debt recovery team.