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The most common causes of business cash flow problems

The most common causes of business cash flow problems

Managing your business’s cash flow is one of the most important tasks a small business owner can have. It’s the lifeblood of your operations, both now and in the future. Without sufficient cash flow, you can’t pay suppliers, advertise to reach your customers, pay your staff’s wages or invest sufficiently in growth. According to ASIC, cash flow problems are one of the most common factors contributing to the failure of small businesses in Australia. Over 40% have reported this as the reason for their demise. Knowing this, you must address the problem proactively to ensure your business’ ongoing survival and maximise its potential to prosper. Let’s look at the most common causes of cash flow problems regularly impacting small to medium enterprises like yours.

Inappropriate pricing structures

We are currently experiencing inflationary pressures not seen for many years. For many new businesses, this is something that hasn’t been an issue before but might be now. Prices of supplies are increasing, and the cost of rent has more than recovered from Covid lows, continuing to rise. As your expenses rise, so does pressure on your cash flows. Depending on your product or service, you will need to pass these costs onto your customers to maintain your margins. You need to know how your customers respond to your pricing. Certain industries are more price-elastic than others, meaning price rises may impact customer demand more than others. Know how your pricing affects your customers, and be sure to regularly review your pricing structures to maintain, or at least manage, your margins. Doing so means your business is both more in touch with your competitive environment and potential threats to your cash flows.

Late payments from customers

If you sell your goods and services on credit, you’ve undoubtedly experienced customers that like to take their time to pay you. When this happens once or twice, it’s not a big deal. When it happens, again and again, it can have potentially serious complications. Many businesses rely on cash from their customers. Without prompt payment, they can’t purchase supplies for new projects, invest in expanding their business or sometimes even pay their staff. Address this head-on with clients that make this a habit by reminding them of your payment terms and making it easy for them to remember to pay, using services such as e-invoicing and automatic reminders.

Seasonal sales cycles

Most businesses experience lumpy sales; it’s a simple fact that some times of the year are more conducive than others. Other businesses are entirely unpredictable and hard to predict. Either way, having a rough plan in place to minimise the impact of quiet times while maximising the opportunity during boom times is the best way to manage this threat to your business’s cash flows. For example, if you run an outdoor activity operation, adjust your staffing commitments based on the climate and history of customer demand. Reduce variable costs where possible and be ready to scale up when appropriate.

Substandard inventory management

Similarly to the above, selling physical products requires sufficient inventory to meet customer demand. Without stock on hand, customers may go elsewhere. With freight costs elevated and supply chain issues still subsiding, managing your inventory levels is necessary to prevent pressures on cash flow. Paying for goods upfront that may take months to arrive and then even longer to sell to cash-paying customers ties up a serious amount of working capital. You need to figure out what works best for your business as there is a delicate balance between having too much stock on hand or on order and not having enough to meet customer demand and sales.

Poor finance planning

One way to address all the above is to have appropriate business financing in place. The right solution will ensure you have the cash needed to pay suppliers, staff and other fixed costs while investing in growth and managing seasonal or lumpy revenue. A business loan is a solution, but it often doesn’t scale well, with fixed payments that may contribute to your cash flow pressures if not used effectively.

A fantastic alternative option used by an increasing number of small businesses is debtor finance. Debtor finance allows you receive cash upfront for your unpaid invoices issued to customers. Instead of waiting 30 days, or often longer, to receive payment, you can use the cash to purchase supplies or invest in growth in as little as 24 hours from invoice issue. It’s scalable, meaning you can borrow more the more your sales increase and reduce payments when your sales dip through the seasonal cycle.

Capital Plus Finance is an experienced business finance broker that has your best interests at heart. With a panel of many lenders, The Capital Plus Finance team will do everything to help you secure a suitable finance solution, including debtor finance. Please call us anytime to find out more or to have an obligation-free chat about your personal and business situation.