4 Common Cash Flow Problems
Cash flow issues are inevitable.
A business undergoes a cash flow problem when its cash outflows exceed inflows.
With a host of cash flow challenges, below are four common reasons why a business might be struggling:
Late Payments from Buyers
This is one of the biggest cash flow issues affecting businesses.
As businesses need to pay expenses, a delayed payment reduces cash inflows while adding pressure to pay bills on time.
Businesses might be falling in a vicious cycle of inability to make payments (suppliers, loans, salaries) that may cause them to collapse.
Late Payment Culture
Late payment phenomenon is a significantly growing trend in the US and the UK.
The US receiving the largest value of invoices was the worst late payer in 2019. US companies take an average of51 days more to settle invoicesto UK firms.
Overall, 43% of invoices were paid late by UK companies.
These late payments vicious cycle has a crippling effect on the supply chain.
On a study done by Nexus,51% of suppliersclaim that they received more late payments in 2021 compared to previous years.
However, Previse revealed that businesses tend to pay their smaller suppliers30 days laterthan their bigger counterparts.
A study conducted by theFSB in the UKshowed that nearly 50,000 SMEs close each year due to slow payments!
This has caused SMEs to:
- Delay Hiring 40%
- Delay Inventory Purchase 39%
- Cut Employee Hours 36%
The impact of late payments on small medium enterprises.
The primary reason behind this is cash flow issues faced by buyers.
Poor cash flow is one of the biggest killers of small businesses. In a survey conducted by the US bank, a massive82% stated cash flow problemsas their major reason for business failure.
Was it not for these delays, businesses could invest this money to grow and repay debts more quickly.
It is essential for businesses to know how to tackle late payments to avoid recurrence of such delays in future.
Insufficient Cash Reserves
While a major problem is cash shortage due to delayed or no cash inflows, another is not having enough cash to battle this shortage.
Cash reserve is an essential safety net that gives your business cushioning against unprecedented or unexpected circ*mstances.
However, many businesses struggle to maintain a good cash reserve to sustain during low cash inflow periods.
Based on a JP Morgan Chase study, SMEs manage to have an average of only27 cash buffer daysto cover their cash outflows if their cash inflows were to stop.
The avg. number of days a business could pay out of its cash balance if cash inflows were to stop.
To find out how many cash buffer days your business has, use the below formula: Cash Balance divided by Cash Outflows equals to Cash Buffer Days.
Cash Buffer Days equals to cash balances divided by cash outflow
What’s more is that47% of small businesseswould need to resort to their personal funds were they to face a two-month loss. Also, 17% of whom say so, would need to close their business.
Insufficient cash reserves is a serious cash flow problem and businesses must learn to save cashto avoid bankruptcy after all cash adjustments have been made.
Inventory Overstock
It is always good to have extra inventory supply as a buffer to meet unexpected surges in demand. This is important for better inventory control that helps avoid stockout costs.
However, an overstock is a sign of poor inventory management and slow business growth.
Excessive inventory can slacken cash inflow and lower liquidity. This may leave the business with ample cash tied in tangible assets which could otherwise generate revenue.
Inventory management is particularly a problem for retail businesses whose products are tangible assets.
Urge for Rapid Business Growth
Who doesn’t want quick growth and expansion?
Oftentimes, the more you want to grow = the more you must spend to run a business.
This includes additional overhead costs, such as:
- hiring new employees
- increasing inventory investment
- improving technology and infrastructure
- outsourcing
Businesses often underestimate how growth affects cash flow.
B2B sales are often made on 30-90 days payment terms. As deals grow, the business has more sales tied in accounts receivables.
While companies wait 1-3 months to get paid, suppliers and other expenses must be paid either upon receipt or by month-end.
This causes cash flow problems to escalate quickly.
One must understand and manage financial and other business risks properly, or else it will be difficult to make ends meet with limited debt-paying ability.
