It may sound odd, but a business can be profitable on paper and still run out of money.
It is one of the most common and most misunderstood problems in small business finance and it catches out growing, seemingly successful, businesses just as often as struggling ones.
Cashflow tend to build up gradually, through a series of small decisions and delays, until one month the numbers simply do not add up.
The good news is that most causes are identifiable and most are fixable once you know where to look.
Profit and cash are not the same thing
Profit is an accounting measure, while cash is what is actually sitting in your bank account.
A business can win a large contract, invoice for it and record a healthy profit on paper, while still being unable to pay its suppliers because the customer has not paid them yet.
This gap between recorded profit and available cash is where most cashflow problems start and it only gets worse the longer it is left unaddressed.
Common causes worth checking first
Before assuming a cashflow problem is a sign of deeper trouble, it is worth ruling out some of the more common and more fixable causes:
- Slow paying customers, particularly where credit terms are generous or poorly enforced.
- Overtrading, where the business is growing faster than its cash reserves can support.
- Too much cash tied up in stock or work in progress.
- Seasonal fluctuations that are not planned for outside the busy periods.
- Fixed costs that have crept up faster than revenue, such as rent, subscriptions or staffing.
- A lack of visibility, where nobody in the business is tracking cash on a regular basis until a problem is already underway.
Often more than one of these is at play at once, which is why a general sense that cashflow is tight is rarely enough. You need to spend the time to find the key issues that are constraining your cashflow.
Start with a short-term forecast
A simple 13 week rolling cashflow forecast is one of the most useful tools available to a small business.
List expected income and outgoings week by week, update it regularly and then compare it against what actually happens within your business. Review and adjust each time to take the necessary actions to build a healthier cashflow outlook.
Doing this gives you early warning of pinch points before they arrive, rather than discovering them when a payment fails to go through.
It also makes conversations with your bank, landlord or suppliers much easier if things are looking tight, since you can show exactly what is coming and when.
Tighten up credit control
Late payment from customers is one of the most common causes of cashflow pressure and often one of the easiest to improve.
Invoicing promptly and following up on overdue accounts quickly and consistently is the best approach, even if it may feel like you are being annoying.
Be clear about payment terms from the outset and review them when working with a new customer to ensure that match any level of risk.
It is also worth reviewing who you extend credit to and on what terms. Not every customer needs 30 days and some may need closer monitoring than others based on their payment history.
Review stock, work in progress and payment terms
Cash tied up in stock that is not moving or work that has been done but not yet invoiced, is cash that is not available to the business.
Regularly reviewing stock levels and invoicing as soon as work is complete, rather than batching it up, can free up cash more quickly than most business owners expect.
On the other side of the ledger, it is worth reviewing your own payment terms with suppliers.
Paying too early, out of habit rather than necessity, is a common and avoidable drain on available cash, but don’t add to the problem of late payments.
Know your options if pressure builds
If cashflow pressure is becoming a regular pattern rather than an occasional squeeze, it is worth looking at your options early rather than waiting for the situation to become critical.
This might include renegotiating supplier or lender terms, agreeing a Time to Pay arrangement with HMRC, reviewing pricing or exploring short-term funding to bridge a specific gap, such as invoice finance.
If cashflow is causing you concern, or you would simply like a second pair of eyes on your forecasting and credit control, please speak to our team.
