Healthy cash flow is a crucial component of effective business operations, but for various reasons, many businesses in the UK suffer from cash flow problems and the knock-on effects.

In this article, we explore the common causes of cash flow issues, how to spot them and, most importantly, how to solve them.

How to check if you have cash flow problems

Your business cash flow can be heavily influenced by changes in the market, such as the price of goods, utilities and sales levels, seasonality and credit control. So, to prevent gaps in cash flow and the issues this can cause, you need to be proactive and put measures in place to mitigate risks.

However, some cash flow problems are a matter of course for certain industries, and in certain cases, they are unavoidable. So, firstly, how can you check if you’ve cash flow issues or whether you may have them in the near future? Understanding how to calculate your cash flow, tracking your working capital position and effectively forecasting are the first steps in preventing and solving potential issues.

Calculating cash flow 

The simple way to calculate cash flow is as follows:

Cash flow = net income + depreciation – capital expenditure - change in working capital

Income might include sales, investments or bank loans, while expenditure includes staff salaries and operational costs.

Creating a cash flow projection is a way to get a good idea of how money moves in and out of your business. It can highlight times when cash flow might be tight, so you don’t spend money you don’t have or miss the opportunity to seek financial support from elsewhere. 

Unexpected and unforeseen costs are all part of running a business, but accurate forecasting can help you better manage your cash flow each month.

Examples of cash flow problems

Numerous events can trigger cash flow problems, and they can occur in businesses across various industries. Many issues are common and recurring, like suffering from late client payments or when a company needs to make a high-value purchase.

Here are a few examples of cash flow problems in different scenarios:

• A retailer needs to urgently restock and increase marketing spend ahead of the Christmas sales rush, but this leaves the company short on available capital for regular operational needs and liabilities.
• A construction company has just secured a big new contract, which requires additional workforce and materials for the work required on-site, but they’re awaiting payment from a recent project.
• A business has a prime location, and the landlord has just hiked up the rent, whilst various bills have gone up, impacting profits and projected cash flow. 

How broadly do cash flow problems impact UK businesses?

Cash flow problems are one of the biggest challenges for small businesses in the UK, especially as they face rising business rates, growing operational costs and new tax obligations. According to the Office for National Statistics, cash flow issues are the cause of 90% of UK business failures. 

So, if you want to mitigate the challenges of cash flow shortages across the fiscal year, be proactive, efficient and willing to consider capital finance solutions to ease financial pressures.

Which industries are most prone to cash flow issues?

Businesses in certain sectors are more likely to experience cash flow problems than others, due to the nature of their work and the way their payment/invoicing processes operate.

Here are a few of the industries that are most prone to cash flow issues:

• Construction
• Manufacturing 
• Retail and ecommerce
• Professional services 
• Hospitality

The reasons for this are primarily down to lengthy payment schedules, the need to regularly pay out for goods and materials, plus the number of third-party suppliers involved. We’ll look at these causes of cash flow problems in more detail below.

What are the most common causes of cash flow problems?

There are various economic, operational and industry-specific reasons why businesses experience issues with cash flow. Below, we’ve outlined the most common causes of cash flow problems for UK businesses:

• Late customer payments: Alarmingly, more than half of UK SMEs are impacted by late payments, which can be down to inefficient processes for submitting invoices and collecting and chasing payments, plus cash flow issues on your clients’ side. 
• Seasonal sales fluctuations: Certain times of year see spikes in demand, especially during or in the lead-up to holiday seasons. This often leads to cash flow gaps, which can be tricky when you need to invest in inventory and promotion.
• Lack of cash reserves: Having an emergency fund can help cover unforeseen costs, such as increased supply costs or urgent repairs. Without an emergency fund, you may need to eat into key working capital.
• Not creating a clear budget: A budget is the foundation of money management. Poor budgeting or a lack of flexibility to adjust can leave your business exposed.
• Uncontrolled growth: While most businesses strive for growth, growing too fast without the right preparation and infrastructure can lead to expenditure and liabilities escalating.
• Inefficient bookkeeping and inaccurate forecasting: Accurate forecasting is critical for managing cash flow and scoping needs. However, many companies lack modern accounting software or forecasting tools, leading to costly errors and miscalculations.
• Lengthy payment terms: Long payment cycles are commonplace in certain industries, but if you’re waiting for client payments, when tax is due, or you have other key liabilities, cash flow can get tight.
• Low profits/dips in revenue: Start-ups and SMEs often struggle with low profits during the initial growth phase, while there are always times when sales are down, leaving you short on usable capital

What are the effects of cash flow problems?

If you don't address the root causes of cash flow problems and let them escalate, it can seriously impact your business in the short and long term.

The main ways cash flow problems can affect your business are as follows:

• Damage to supplier trust and relationships
• Missed revenue and growth opportunities due to a lack of available funds
• Limits to investment in new stock, staff or promotional activities
• Reduced purchasing power for equipment, system and premise upgrades
• Poor employee morale and high staff turnover
• Loss of customers
• Issues meeting liabilities, such as tax bills and payroll
• Financial pressure, stress and risks of insolvency

However, if you’re proactive in managing your finances and take action before or as soon as issues arise, you can minimise the impact of cash flow problems. 

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Five solutions to cash flow problems

Knowing how to calculate, manage and identify common reasons for poor cash flow can help protect your business. It’s about staying on top of what’s moving in and out of your accounts and finding the right tools to help you manage and improve your cash flow. 

Here are 5 solutions to cash flow problems your businesses should consider:

1. Develop a short-term business survival plan: Dissect your business plan, processes, operations, income and expenses, and use job costing to review your profit and loss statements and margins. The aim is to identify significant expenditure, opportunities for cost savings and where you can scale back if cash projections deem it necessary.

2. Cut down on expenses (where possible): Pinpoint where you’re overspending, what inefficiencies there are and periods when you need extra cash available for key operational expenses. Also, regularly monitor pricing and assess supplier contracts and service/software subscriptions to see where you can make savings, get better terms and boost profits.

3. Accelerate accounts receivable: Speeding up payments can boost your cash flow. So, look to send invoices promptly, follow up overdue accounts, request deposits or partial payments upfront (offering incentives for early payments) and provide additional payment methods. Also, consider invoice financing, which gives you access to funds from pending payments.

4. Renegotiate accounts payable: Explore whether you can get more flexible terms and payment options from your utility providers and long-term vendors. Plus, prioritise critical expenses when cash is tight.
5. Improve your forecasting capabilities: If your accounting processes and systems are hindering forecasting and cash flow management, modernise your approach and leverage sophisticated tools, which will give you better visibility to make informed financial decisions.
6. Use short-term finance to plug cash flow gaps: Injecting capital into your business through borrowing can help stabilise cash flow. Consider various short-term finance options to boost working capital. At iwoca, our Flexi-Loans are designed to meet SME working capital needs, offering fast access to funds and flexible repayment terms.

Read our article on cash flow management for more practical tips and strategies.

How can business finance help and address cash flow?

Business finance helps companies get fast access to available capital when they need it most. This allows you to continue running operations smoothly, manage everyday expenses and meet key liabilities, even in periods of slow sales or when you’ve had to make a significant investment or purchase. 

Here are some of the popular working capital finance solutions to consider to help you prevent cash flow problems:

• Merchant cash advances: This revenue-based finance, allows you to borrow a lump sum in exchange for a percentage of your future credit card sales.
• Lines of credit: Using a business line of credit gives you a set amount to draw from whenever you need it, similar to a business credit card, but you only pay interest on the amount you use.
• Asset finance: These agreements let you hire or acquire key business assets, without a big outlay that impacts working capital, repaying the value of the asset in pre-agreed instalments.
• Invoice finance: Providers advance a large percentage of your upcoming client invoice amounts to unlock capital rather than being out of pocket.
• Short-term business loans: Ideal for small businesses, these loans let you borrow capital to cover temporary cash flow gaps for a few months (or slightly longer), and can be secured or unsecured – typically the latter.

Consider different types of working capital finance and what might best suit your specific circumstances. 

Iwoca is a loan provider for UK SMEs. Our flexible business loans are short-term finance solutions that can help you solve cash flow problems and invest in business growth.  

You can apply for a Flexi-Loan in minutes online and get an approval decision within 24 hours, providing fast access to finance and monthly repayments aligned with your cash flow. Borrow between £1,000 and £1 million, only pay interest on the funds you draw down and repay early free of charge.