A cash flow problem can occur when a business does not have enough liquid assets to cover its immediate financial obligations and liabilities. This can be caused by delays in receiving payments from customers, elevated operating costs, inefficient cash flow management, or protracted payment terms.
Whatever problems that may be holding your business’s cash flow hostage, fear not. Below, we’ve outlined some potential strategies to help you identify and overcome some common cash flow problems and help your business thrive.
Let’s dig in!
Common cash flow problems
Cash flow problems can greatly affect how a business runs. Without enough cash reserves, businesses might struggle to pay their bills, make payroll, or invest in growth opportunities. This lack of cash can disrupt operations, harm relationships with suppliers, and reduce employee morale.
Above all else, not having enough cash flow can limit a business’s ability to expand, making it hard to invest in research and development (R&D), marketing, and other important growth areas.
Understanding the common causes of cash flow problems is the first step in fixing them. Businesses often face these issues because of:
- Outstanding receivables
Late payments from customers can cause major cash flow issues since businesses rely on timely payments to pay their own bills.
- Long payment terms
Extended payment terms with clients can delay cash coming in, making it hard to cover immediate expenses.
- High operating expenses
High costs for things like salaries, rent, and utilities can quickly use up cash reserves.
- Poor cash flow management
Ineffective handling of cash coming in and going out can lead to a lack of cash flow, making it hard to keep operations running smoothly.
- Seasonal fluctuations
Businesses with seasonal demand may have low cash flow during off-peak times.
Experiencing cash flow problems in your business? You’re not alone
Cash flow problems are something many businesses deal with, no matter their size or industry. For startups and small to medium-sized enterprises (SMEs), managing cash flow can be especially tough due to high costs like research and development (R&D) and the long wait times for tax refunds. But don’t worry—with the right strategies and support, you can overcome these challenges and help your business succeed.
Here are 6 easy steps that may help you start to overcome your cash flow challenges:
1. Reduce excessive borrowing
A business can run into financial trouble if it takes on too much debt. High levels of debt can lead to significant interest payments that drain cash flow, making it difficult to cover other business expenses. Additionally, excessive borrowing can dilute equity, as businesses might be forced to seek additional funding through equity financing to manage debt, leading to ownership dilution.
Almost every business needs financing at some point, but it’s crucial to choose the right type of financing and avoid borrowing more than necessary.
If debt repayments are causing cash flow issues, you might like to consider refinancing current high-interest debts. For example, if you have credit card debt or a high-interest overdraft, consolidating these with a business loan can reduce your monthly payments and interest costs. This approach can free up cash flow, allowing you to manage your finances more effectively and invest in other areas of your business. If this is a challenge impacting your business, we recommend talking to a business finance professional to receive solutions tailored to your specific situation.
R&D Financing: A smart way to cut down on borrowing
R&D finance solutions offer a unique and strategic alternative to capital raising to help manage and reduce excessive borrowing. By providing early access to R&D tax refunds, these loans can serve as a lower-cost alternative to traditional high-interest debt. Instead of relying on expensive credit options, you can use R&D finance to maintain positive cash flow and support your business operations.
With an R&D loan, you can access up to 80% of your anticipated year-to-date R&D tax refund within days, reducing your reliance on high-interest borrowing and freeing up funds for other critical business expenses. If you’d like to know more about how R&D financing can help you overcome cashflow problems in your business, contact us today and talk to one of our specialists.
2. Diversify your payment methods
Offering different payment options to your customers can greatly speed up how quickly you receive payments and improve your cash flow. Accepting credit cards, bank transfers, and digital wallets gives your clients more flexibility and can lead to quicker payments. By diversifying your payment methods, you make it easier for customers to pay you faster.
3. Conduct regular cash flow forecasting
Regular cash flow forecasting is essential for predicting and avoiding cash flow problems. By estimating your future income and expenses, you can plan ahead and prevent financial shortfalls. A thorough cash flow forecast can help you spot potential issues early and take action to keep your business financially stable.
Accurate forecasting can be key to maintaining positive cash flow, which is vital for business growth and success. Here are a couple of tips on how to conduct regular cash flow forecasting to help get you started:
- Gather past financial data
- Collect information on your past income and expenses, including sales, payments received, operating costs, and bills paid.
- Use data from the past 6-12 months to see patterns and trends.
- Estimate future income
- Predict future sales based on past data, market trends, and any upcoming events that could affect revenue.
- Include other income sources like loans, grants, or investments.
- Consider seasonal changes and industry factors that might affect income.
- Estimate future expenses
- List all expected costs, including fixed expenses (rent, salaries, utilities, etc.) and variable costs (inventory, materials, marketing, etc.).
- Include any big upcoming expenses, like equipment purchases or loan repayments.
- Account for planned investments in R&D or business expansion.
- Create a cash flow forecast spreadsheet
- Organise your data in a spreadsheet, showing monthly (or weekly) income and expenses.
- Use columns for each month and rows for different income and expense categories.
- Calculate the net cash flow for each period by subtracting expenses from income.
- Analyse the forecast
- Look for periods where expenses are higher than income, which indicates potential cash flow problems.
- Identify trends and patterns that might need adjustments in your financial planning.
- Take proactive steps
- Develop strategies to address predicted cash flow gaps, such as getting a line of credit, negotiating payment terms with suppliers, or cutting non-essential expenses.
- Plan to keep a cash reserve to cover unexpected shortfalls.
- Review and adjust regularly
- Regularly review your cash flow forecast (monthly or quarterly) and update it based on actual performance and new information.
- Adjust the forecast as needed to reflect changes in your business or market conditions.
- Use cash flow forecasting tools
- Consider using software or financial management tools that automate data collection and analysis, providing more accurate and timely forecasts.
4. Manage your outstanding receivables
Effectively managing outstanding receivables is crucial for maintaining positive cash flow. By systematically following up on unpaid invoices, you can collect payments more quickly. Setting clear payment terms and sending regular reminders to clients can reduce the time it takes to receive payments, thereby improving your working capital. Poor cash flow often results from outstanding receivables, so efficient management is key to resolving this issue.
5. Optimise payment terms with suppliers
Negotiating more favourable payment terms with your suppliers can help balance your cash inflows and outflows. By arranging longer payment terms with suppliers and shorter terms with customers, you can ensure a more consistent cash flow. This strategy allows you to hold onto your cash for longer periods while still meeting your obligations. Optimising payment terms is a practical approach to managing short-term cash flow issues and ensuring your business remains solvent.
6. Build and maintain cash reserves
Cash reserves are crucial for small businesses, as they provide a buffer against common causes of cash flow problems. Maintaining a healthy cash reserve is essential for cushioning your business against unexpected costs and changes in cash flow. By setting aside part of your profits as a cash reserve, you create a safety net that can help you manage cash flow problems more effectively.
While we always recommend speaking to a financial specialist who can give you tailored advice, here are a couple of tips that can help you build up and maintain your cash reserves:
- Set a savings goal
Determine a target amount for your cash reserve based on your business’s monthly expenses and potential emergency needs.
- Automate savings
Set up automatic transfers from your business checking account to a separate savings account. This ensures consistent contributions to your cash reserve without relying on manual transfers.
- Cut unnecessary expenses
Review your monthly expenses and identify areas where you can reduce costs. Redirect the savings from these cuts into your cash reserve.
- Allocate a percentage of profits
Commit to saving a fixed percentage of your profits each month. Talk to a financial professional to determine what % or your monthly earnings you should put away to put your company in the best financial position.
- Monitor and adjust regularly
Regularly review your cash reserve to ensure it meets your business needs. Adjust your savings goals as your business grows and your expenses change.
- Reinvest unexpected income
Use any unexpected income, such as tax refunds or bonuses, to boost your cash reserve instead of spending it immediately.
- Separate accounts
Keep your cash reserves in a separate, easily accessible savings account to avoid using these funds for regular operating expenses.
Rocking Horse Group is your partner in cash flow management
At Rocking Horse Group, we understand the challenges businesses face in managing cash flow. Our R&D finance solutions are designed to provide quick and reliable access to funds tied up in R&D tax refunds. By partnering with us, you can build your cash reserves, maintain positive cash flow, and focus on growing your business without the burden of financial constraints. Our expertise in R&D finance ensures that you can access the working capital you need to drive your business forward.
Ready to improve your cash flow?
If you’re ready to tackle your cash flow problems and achieve business growth, get in touch with the experts at Rocking Horse Group today. Our expert team is here to help you navigate the complexities of R&D finance and unlock the full potential of your business. Don’t let cash flow issues hold you back – contact us today and let us support you in building a financially stable and successful business.