Cash flow problems are common; this an issue that we come across far too often. The reality is that more than half of SMEs don’t survive longer than 5 years, and we have found that poor cash flow is a very good indicator of things going downhill.

Cash flow – what is it?

The money flowing in and out of a business; cash flow is usually measured over periods of time that are usually determined by the size of your company. For example, it could be quantified over annual, quarterly or monthly periods.

1. Bad debts

Cash flow problems often stem from bed debts – those debtors that can’t be recovered

Unfortunately, many of our clients have come to us after unpaid debtors books have led to defaulted payments on their behalf; things do spiral quickly if action isn’t taken.Companies should have credit control systems in place to collect any money that is owed in from customers. We are in no doubt that prioritising the efficiency and effectiveness of this system is important, especially when the company is in its infancy

Honestly, this is easier than it sounds – as long as your business keeps its books up to date, which it always should – the process is straightforward.Many companies simply need to set aside some time to administer reminder emails and letters, and to pass anything overdue to recovery firms in a timely manner.Bad debts can quickly lead to cash flow problems, and in our experience, credit checks on customers that are being offered credit are usually a must.This doesn’t mean that you have to refuse their custom if their credit record is poor, but measures can be put in place such as deposit requests or partial invoices if this is the case.

2. Forecasting (or a lack of it)

Cash flow forecasts are essential for any new business. Your accountant can compile this for you so it shouldn’t use up any of your time

The fluctuation of cash from month to month can be predicted to enable you to estimate how much cash you will need to survive over the next year or so – obviously, this is key to avoid cash flow problems.The further down the line you are the more accurate your cash flow forecasting will become; this is because comparing actual figures to predicted ones will bring insight and, of course, enable you to adjust the figures so that they are more accurate going forward.Investigating the reason for any discrepancies will achieve this – if you discover that you are spending more than you had thought on your utility bills, for example, you could look at your energy efficiency and whether other providers would be cheaper

After the initial period, your forecast will be robust enough to aid decisions such as expense cutting or novel investment spending.

3. Lack of organised bookkeeping

There is lots of information out there on the initial start-up costs of various businesses, but little about the working hours that an individual needs to put in for the first months and years, which are usually verging on the ridiculous

Unfortunately, we have found that many of our clients have neglected their bookkeeping in the initial stages because they have found themselves having to be a one-man-band.Many directors simply feel that they don’t have enough hours in the day and assume that they can catch up with this later.This is often the root cause of cash flow problems – the sooner you catch an issue, the more likely you are to be able to rescue the business, and how can you expect to be aware of any snags if the company books aren’t complete

It is so important to put a few hours aside (we recommend one day a week) to work ON your company rather than IN your company.Many that we have worked with have unfortunately needed to close their companies simply because they had not noticed that payments were overdue or inconsistent invoices were being sent out due to poor bookkeeping.As long as you have caught the issue in time, there are things that can be done. We have found that using a robust accounting system is the best way to get company books in order, and of course someone needs to allocate time to keep this up to date.Trust us, it will be worth it once a strong cash flow is in place and no more red letters are falling on your doorstep. The next step will be to generate useful reports to enable you to understand your company’s cash flow in simple terms.

4. Fast growth

Growing your business too quickly can, unfortunately, hurt the business by causing cash flow problems. Of course growth is positive, but if the company cannot keep up with it then things can quickly spiral out of control

This doesn’t mean that you should always stay in your comfort zone or refuse business, but when taking on custom that will incur more than your company’s usual costs, these should always be worked out prior to agreement. Seeking a bank overdraft or short term loan will usually cover the shortfall, and is easier to achieve than you may think. More often than not, showing a letter of intent or drafted contract to the bank will allow them to lend the cash that the business needs to hire those extra staff or order stock in bulk, for example.This will mean that credit terms can still be offered to the customer and the job will go ahead without a hitch – there is nothing worse than angry staff when there is no cash in the bank come payday.The debt can be repaid as soon as the customer has paid, so interest will only be paid on the amount of time that you needed.

5. Profit problems

A lack of profit will, of course, lead to poor cash flow. Consistent profit losses will ultimately lead to the failure of a business, but the time that it takes to come to this will depend on a few factors.Companies can survive without profit for a while if they have cash reserves as a result of previous profits, but unfortunately, it will eventually catch up with you, no matter how many savings your company has

We would hope that you will immediately be aware if your business is not making a profit, and it is important that the underlying problems are addressed with urgency.Any measures taken should either increase sales figures, price or lower costs.

6. Credit term issues

Another problem that we have found at the root of cash flow problems are customer credit terms which don’t line up with the suppliers’ credit terms. These issues can quickly spiral into poor cash flow to the extent that company bills can’t be paid.Misaligned credit terms could mean that your supplier is demanding payment within 12 days, but you have extended 20 days of credit to your customers. It’s not hard to see that cash flow problems could soon build up from this scenario.In this situation, re-negotiating terms should be your first port of call, but this isn’t always easily done. The best alternatives to consider include:

1.Offering discounts on early payments

Early settlement discounts could solve cash flow problems quickly; offering 2-3% price reductions are likely to entice early payments from customers.Invoice

2.Factoring

Instructing a financial body to ‘buy’ your invoices from you can be agreed on a short-term or continuing basis. This way, the factoring company will pay the majority of the invoice amount upfront and chase the debtor themselves, effectively solving cash flow problems.

Next steps

If you are experiencing cash flow problems then you are not alone, especially if you are still within the first few years of your company incorporation; these first years tend to be a huge learning curve for most directors.As long as you are aware of these issues then you can tackle them head-on.