How to overcome your cash flow problems

Many businesses experience cash flow problems during their lifetime. Find out how you can calculate cash flow, identify problems, and improve performance.

3 August 2021

How to overcome cash flow problems

Cash flow is one of the most important terms to anyone who owns a business. Some people mistake cash flow for revenue or transactions, but it actually describes all of the money coming into your business and – equally – all of the money going out.

As a business owner, it’s crucial to pay attention to your cash flow. Problems may arise from time to time, but there are ways to tackle these challenges so that your cash flow stays healthy and your business keeps running.

How to calculate cash flow

The first step in solving cash flow problems is to know how to calculate cash flow itself. This is simple:

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

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

Forecasting for cash flow is a great way to better understand 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, and they will crop up, but an accurate forecast can help you to better manage your cash flow each month.

Causes of cash flow problems

Sales challenges

If sales come to a standstill or your sales volume forecast was too optimistic, your income will be affected, impacting your cash flow. A decline in sales can be caused by external factors such as changes in the market or internal ones like weak marketing or poor lead nurturing.

Rapid growth

Making more money goes hand in hand with spending more money. As you grow, your operational costs can increase because you’re: hiring more employees; upgrading IT systems; investing in new software for your business, or stocking up on inventory.

Spending too much

If you’re spending more cash than is coming into the business, you should investigate where the high costs are and how you can reduce or remove them entirely.

Late or partial payments

Invoices that are paid late can negatively impact your cash flow, especially if you’ve incurred costs to get the job done. Getting paid on time is crucial to keeping your cash flow healthy. According to Xero, invoices without a digital payment option can take up to twice as long to get paid. Adding an invoice payment option like iwocaPay means you’ll give your business customers an easy way to pay with the flexible terms they want – and you save time chasing fewer invoices: win,win!

Poor cash flow effects

Poor cash flow can negatively impact a business, but only if it isn’t handled well. Effects of poor cash flow can include:

  • damaging relationships with supplies waiting to be paid
  • missing opportunities that can’t be funded
  • poor employee morale and high staff turnover
  • stress and worry
  • insolvency.

But don’t worry – if businesses can take action as soon as problems arise, and are proactive in managing their finances, they can avoid these effects entirely.

How to improve cash flow

According to the Office of National Statistics, cash flow issues are the cause of 90% of UK business failures. . Knowing how to calculate, manage and identify common reasons for poor cash flow will help make sure you can keep your business flowing. 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 as you go.

Actively managing your business operations and processes is a great way to manage your cash flow. During your procurement, curate great supplier relationships that can lead to better terms and deals. As your business develops – don’t be afraid to: experiment with changing your prices; audit your inventory and remove low-selling products, and review your list of clients to see if any late-paying culprits are impacting your cash flow.

How iwoca can help with cash flow problems

Cash flow problems will exist, but you can manage or even prevent them from happening in the first place. We’ve created our Flexi-Loan and iwocaPay products to help you do this.

A Flexi-loan is ideal for anyone looking to manage cash flow in the short term or who needs extra financial support to grow their business.

iwocaPay can help businesses get their invoices paid sooner by making it easier for their customers to pay straight away. Both products are perfect for any business owner who wants to take charge of their cash flow and ensure business success.

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Charlotte is a PR & Communications specialist at iwoca.

Article updated on: 6 October 2021

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