6 common causes of cash flow problems

October 23rd, 2018

According to statistics from the Australian Securities and Investments Commission (ASIC), the percentage of Australian small businesses failing is rising, with cash flow struggles a significant factor. In fact, 41% of owners nominate cash flow as the primary cause of their business’s failure.

With leading research company Dun & Bradstreet estimating that more than $19 billion in payments owed is not paid within 30 days, it’s no wonder many small businesses are finding cash flow a major obstacle to success.

While most businesses will encounter cash flow problems at some stage, understanding some common causes – and how to solve them – will put you in good stead to manage your cash flow peaks and troughs and ensure that your business is financially viable into the future.

01. Poor financial planning

It’s said that failing to plan is planning to fail. For many small businesses, the lack of a disciplined approach to financial planning is an ongoing cause of cash flow shortages. Working to a detailed forecast, financial plan and budget – and reviewing and updating these important documents regularly – will mean that you can foresee any potential cash flow shortages and take action to ensure they’re well managed. This might include having a readily actionable plan to access additional funding if it’s needed.

02. Declining sales or profit margins

Declining sales can have a devastating effect on your cash flow. A reduction in sales might be driven by an increase in competition from local or international competitors, a general decline in sales across your industry, or softening economic conditions. If your overheads stay the same against declining sales, you’re likely to find yourself in a dangerous financial situation fairly quickly.

Likewise, erosion of profit margins can hit your business hard. Even if overall sales are growing, if your margins are getting smaller, your profitability will be negatively affected. You should continually review your gross profit margin to ensure that your pricing is competitive but doesn’t have your business running at a loss.

03. Consistent late payments

It can put a considerable strain on your cash flow if your customers consistently miss your payment deadlines. A recent report by Xero suggests that, on average, customers take about 36 days to pay invoices with 30-day terms. With this in mind, it’s sensible to assume that all your debtors are unlikely to pay on time and ensure you have a cash buffer to draw upon if needed. It’s also worth considering tightening your credit control processes and looking at ways to encourage your customers to pay on time.

04. Poor inventory management

Poor inventory management can be a costly mistake. A glut of excess stock means that valuable cash is tied up in product that’s sitting with you rather than your customers. Additionally, if you buy in bulk and don’t turn over your stock quickly, there’s a risk that it could become obsolete and unsellable.

A strategic approach to inventory management will allow you to avoid the costs associated with poor stock management. You should have a robust inventory management system in place, monitor inventory levels carefully, undertake a physical stocktake on a regular basis, and clear discontinued or obsolete stock periodically.

05. Inflexible funding facilities

Whatever your approach to funding, you should continually assess whether it’s the right solution for you. A solution that worked for you as a start-up won’t necessarily be the best choice if your business is in the expansion or maturity stages of the business lifecycle, for example.

The funding options available to small businesses continue to evolve. You should benchmark your current funding solution against other products in the market every so often to check if there’s a better fit for your business.

06. Seasonal variation

Most businesses have seasonal highs and lows. Peak periods are great for sales – but they’re often associated with extra costs such as additional staff and stock. Likewise, if your business is going through a sales lull or dealing with a number of debtors who are not meeting your payment terms, your finances are likely to be under pressure.

It’s important to understand your business’s seasonal cycle – and also to appreciate that these can be disrupted due to a change in weather, supplier terms, or other external factors. For this reason, you should ensure you hold a cash reserve for when times are tight; it’s also worth considering applying for a funding solution that you can access on an as-needs basis.

Earlypay has helped small businesses across Australia access flexible funding solutions for more than 30 years. Our flexible invoice finance and equipment finance solutions help take the pressure off when cash flow is tight.

We offer a free 30-minute phone consultation to explore the most suitable funding options for you and your business, considering your specific priorities and challenges. Get in touch with  us on 1300 760 205.

If you'd like to learn how Earlypay's Invoice Finance & Equipment Finance can help you boost your working capital to fund growth or keep on top of day-to-day operations of your business, contact Earlypay's helpful team today on 1300 760 205, visit our sign-up form or contact [email protected].