How To Identify Cash Flow Problems (& What To Do About Them)
Identifying and addressing cash flow problems is essential for the long-term viability of any business. No matter the cause, cash flow problems can result in the business not having enough cash at the right times. If ignored, this may result in cash flow insolvency and ultimately push the business towards liquidation.
Though cash flow problems can happen to any business, experience and education can go a long way towards limiting the damage caused by this kind of financial difficulty. This guide will equip you with the knowledge you need to not only understand how to identify cash flow problems but also to help you feel confident solving them.
Warning Signs Of Cash Flow Problems
In an ideal world, you will be able to learn how to identify cash flow problems before they escalate into a more significant problem. By catching these problems at an early stage you will have more time to find a suitable solution and be able to incorporate more long-term strategic measures into your financial planning to avoid cash flow problems arising in the first place.
There are a number of warning signs of cash flow problems to be aware of. These could be to do with the actions of your business; for example, if you are struggling to pay bills on time, struggling to stay on top of your inventory and financial records, or overtrading. However, cash flow problems can also be caused by external factors such as delays in receiving payments from your debtors. While this can be harder to manage, there are still measures you can take to prevent cash flow problems seemingly out of your control from spiralling into something more significant.
Cash Flow Analysis
If warning signs start to build or you want to get a concrete understanding of the extent of possible cash flow problems, the most important step you can take is to carry out a detailed cash flow analysis. Cash flow analysis should offer a crucial understanding of the movement of cash in and out of your business over any given period. With the findings of this analysis, you can then assess what the root cause of the problem may be and whether it is a short or long-term issue.
To conduct cash flow analysis, there are three key categories to look at which cover all areas of your business. These are:
- Operating activities, including cash generated or used in the day-to-day running of your business.
- Investing activities, including cash related to buying and selling assets.
- Financing activities, including loans and credits.
While there is no one-size-fits-all answer when it comes to what the outcome of this analysis should be, the aim is to have positive cash flow across all areas. If not, explore why. By identifying the problem areas, you can then target your efforts to rectify the issue where they are needed most.
How To Solve Cash Flow Problems
If preventative action is not possible or you quickly or unexpectedly develop cash flow problems, there are still a number of solutions before the issue develops into a deeper problem like insolvency.
Negotiate Payment Terms With Suppliers
When cash flow problems occur due to your own ability to pay debts on time, the best thing you can do is be upfront with your suppliers. Engage in open and honest communication with them, explaining the issue with the view to negotiating more favourable payment terms. This may involve extended payment periods or instalment plans and gives you clarity when it comes to understanding how you will move forward. Being transparent can also reassure suppliers that you have a plan to rectify the situation which may make them less likely to pursue claims against you.
Cut Back On Costs
One of the most common causes of cash flow problems is excess expenditure. Fortunately, with the right action, this problem can be solved quickly and effectively. Conduct a thorough review of expenses and identify areas where costs can be streamlined without compromising the quality of products and services. This might involve renegotiating contracts with staff and suppliers, optimising production processes, and reevaluating your overheads.
Improve Invoicing
If debtors are slow to pay, cash flow problems can quickly escalate. While you can never entirely control the actions of the businesses you work with, you can certainly take steps to speed up the payment process and improve the debtor-creditor relationship. One way to do this is to make sure that your invoicing is as timely and accurate as possible. Send invoices promptly and always follow up on overdue payments to increase the likelihood that the cash you are owed will be in the bank at the right time.
Speak To A Professional
While there are plenty of steps you can take yourself to solve cash flow problems, it is still always wise to speak to a professional. Many businesses experiencing cash flow problems may also be experiencing insolvency and this brings its own set of challenges best managed by an experienced professional. A licensed insolvency practitioner can talk you through all of the options available to you, confirm whether your business is insolvent or not, and advise on the most appropriate liquidation route if required.
Get in touch with the team here at My Liquidation today to get expert advice if your company is concerned about or experiencing cash flow problems.
