Your business might look like it’s making money on paper, but running out of cash at the wrong time can mean financial disaster. This is why it’s important to keep on top of cash flow management, even if it does feel like there’s more important things to focus on.
Problems with cash flow don’t usually come out of nowhere. They tend to build up over time, initially caused by small financial problems, operational stress and delays in decision making. When you spot cash flow warning signs early, you have more time to find a solution.
Early Signs Your Cash Flow Might Be in Trouble
Customers Taking Longer to Pay
The amount of cash you have to use immediately drops if your invoices are not paid on time. Even a small rise in late paying customers can put a significant amount of stress on your finances. This is why it’s important to keep an eye on things like debtor days increasing from one month to the next, customers asking for longer payment terms and having more overdue invoices than usual. Spending more time chasing invoices is also a sign that your customers are taking longer than usual to pay.
You’re Paying Suppliers Later and Later
A lot of businesses put off paying suppliers when they need cash and though this might help for a short time, it usually hurts valuable relationships with suppliers. If you’re deciding which bills to delay, regularly negotiating longer credit terms and only paying the minimum instead of the full balance, there’s a good chance your cash flow is struggling.
Your Cash Reserve is Going Down
A healthy business is one that has cash to fall back on, ready to use in an emergency. There’s no guarantee that your business will be able to continue operating if cash reserves start depleting, especially during busy trading times. This tends to happen when costs are rising faster than sales, you’re spending a lot upfront to boost sales, and your margins are getting smaller.
You Rely on Credit to Run Your Business
There’s nothing wrong with using credit to invest and grow your business, but you shouldn’t be relying on it to cover everyday expenses. If you’re using credit to cover your business’ day-to-day operating expenses – for example, if you’re using your overdraft all the time or you’re taking out short-term loans to cover payroll – you might need to take a look at your cash flow. Depending on credit is often a sign of deeper, more serious financial problems.
Tax Deadlines Fill You with Dread
Paying tax is a predictable part of running a business, but deadlines cause a lot of stress when money is tight. If you find yourself struggling to pay HMRC when tax deadlines arrive, and if you’re scrambling around trying to find the money from somewhere else, you need to reevaluate your cash flow.
Business Growth is Putting a Strain on Finances
More often than not, you need to spend money on business growth before you see the financial benefits. This is because more customers and more sales usually means more stock, more workers and higher production costs. If you feel like expanding your business is financially stressful, rather than exciting, you might be trying to do too much. There’s a risk that your business is growing faster than you can realistically afford.
What Happens If You Don’t Pay Attention to Cash Flow Struggles
When it comes to cash flow problems, you can’t bury your head in the sand and ignore the warning signs. Cash flow problems rarely appear out of nowhere. They tend to start small and slowly worsen, which means you have the chance to spot them early. To do so, you need to pay attention to the money flowing in and out of your business at all times.
Increasing Stress
Realising your business is dealing with cash flow problems can be hugely stressful. At first, this stress might seem manageable. Perhaps there’s a late payment or two, or you’re using credit slightly more than usual. But, things quickly spiral and before you know it, the stress is impacting your productivity and wellbeing.
Relationship Damage
Not being able to pay suppliers on time and failing to keep up with credit repayments can damage professional relationships. It can lead to suppliers no longer trusting you – potentially even asking you to take your business elsewhere – the quality of service dropping and your business’ reputation being permanently damaged.
Increased Costs
In business, having less money can actually cost you more in the long run. If you borrow money in an emergency, you’re likely to be faced with higher interest rates. If you fail to make payments on time, you’re probably going to be charged penalties and fees. These extra charges make your costs go up, which makes it harder to recover.
Legal and Compliance Pressure
If your cash flow problems are serious, you might find yourself under legal and compliance pressure. If you don’t meet your obligations, regulators or creditors may take action. This can even lead to your business undergoing a formal bankruptcy process, which may be necessary if debts can’t be paid.
Lack of Strategic Control
When you don’t have enough money to sustainably run your business, long-term planning tends to stop. There’s no money for growth, to hire new talent, to upgrade tools and equipment, or to take advantage of exciting opportunities that could drive your business forward. When you’re focusing on business survival, there’s no time or money for strategy.
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Your business might look like it’s making money on paper, but running out of cash at the wrong time can mean financial disaster. This is why it’s important to keep on top of cash flow management, even if it does feel like there’s more important things to focus on.
Problems with cash flow don’t usually come out of nowhere. They tend to build up over time, initially caused by small financial problems, operational stress and delays in decision making. When you spot cash flow warning signs early, you have more time to find a solution.
