11 ways to avoid cash flow problems

9 Dec 2022

As a predominantly service-driven economy, the UK relies on consumers to spend, with seasonal fluctuations also having a considerable impact on the daily cash requirements of small businesses. Here, we'll discuss methods to improve your cash flow throughout the year to avoid potential issues and predict when you might need to access additional funding.

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1. Create a cash flow forecast

Most of us are familiar with the yearly cash flow forecast. 

However, you may want to consider getting more granular by creating a monthly cash flow statement. Regular cash flow statements can help you fine-tune your monthly budget and develop a highly disciplined approach to your spending. 

You can use your monthly cash flow statement to pinpoint the ebbs and flows of revenue and identify any potential budget gaps that need addressing.

2. Invoice promptly

You might offer 30–60 day grace periods for your customers to pay their invoices, but you'll need to have a robust collections procedure to ensure this doesn't get stretched. If clients always pay late, the ripple effect can be damaging.

You could consider offering an early settlement discount of (for example) 1-2% within 14 days. You’ll need to ensure your profit isn't getting hit too hard though.

3. Ask large creditors for an extension

Although you should insist on your payments coming in on time and avoid unpaid invoices, it's not uncommon to ask large creditors for extended payment terms. 

This isn't a hypocritical act of opportunism; it's effective management. These creditors could be utility firms prepared to match payment with your business income or lenders who might offer a payment holiday if you're a seasonal business.

4. Reduce expenses

If you compile the monthly budget we mentioned earlier, you might quickly identify unnecessary spending which you can eliminate.

If you're a sales operation with stock that isn't shifting, why keep ordering? You can't buck the market. If the feedback is negative, it might be best to sell some stock at a slight loss and invest elsewhere in the business before the stock loses value.

5. Increase your prices

Many businesses fear putting up prices because they automatically assume customers will vanish. However, you might want to compare prices with your competitors to see if you're far cheaper than others.

There's a difference between what represents value for money and what's affordable. And context is also key. 

Suppose you're running a restaurant with an excellent local reputation for a fine dining experience, or a salon regarded as the best on your high street. Are your clients likely to avoid you if you raise prices by 10-15%? 

6. Understand business credit cards

A business credit card can provide you with a quick cash boost when you need it, and you’re under no obligation to use it. If you’re unsure your application for credit will be accepted, why not try our business loan calculator below to find out how much you could afford to borrow before beginning an application.

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7. Improve your profit margin

You don't just increase your profit margins by raising prices. 

The price you pay at source dramatically affects the overall profit you retain, and if you buy badly, you'll harm your business. Search for the best available prices in your market and negotiate with your suppliers and creditors. It's in their interest to see you succeed, so ask what they can do to help.

8. Get imaginative with selling 

You can avoid cash flow problems by identifying your quiet times before they happen and implementing clever sales tactics. For example, if your restaurant suffers slow sales after Christmas, get busy by offering a discount for the third visit before Easter.

Think about upselling or cross-selling ideas if you're a retail shop. Get imaginative to think of ways to increase sales through direct communication. Here are some ideas for social media marketing if you’re running on a tight budget. 

9. Ensure you keep a healthy stocking programme

If you're a business that sells products, overstocking can harm your cash flow. 

Sales representatives always want you to buy more, but you must balance their tempting offers with realism. There's little point in having stock gathering dust on shelves you purchased because you think you got a great deal.

You might consider investing in inventory management software. 

This should be able to tell you what's selling, illustrate your sales pattern and suggest a workable buying pattern – including automatically placing orders. It can be a great tool for removing the emotional impulse to stock up unnecessarily.

10. Consider e-commerce

We've all walked away from shops that don't accept cards, then struggled to find an ATM on the high street. Similarly, your website should have a transactional element, even if selling online is not your core business. 

For example, if you're the owner of a salon that doesn’t charge for haircuts in advance online, you could sell gift vouchers and products. A restaurant could sell food products, and an engineer could charge for simple maintenance products.

Applying for card processing is straightforward, with firms eager to get eligible businesses on board. Once accepted, you might even be able to apply for a merchant cash advance.

11. Explore working capital finance

Take time to understand the funding methods that could help prevent cash flow issues from taking root in your business. Working capital finance covers a wide range of options, from overdrafts to short-term loans. Here are four examples:

Flexible business overdrafts

Designed to smooth out short term cash flow issues, a business overdraft is a set amount that is usually added as a facility to a current account. The overdraft limit is there if you need it, and you only pay interest on the amount you use.

You're under no obligation to use the overdraft, and you won't incur any costs if you don't use it – although you might pay an arrangement fee, and the bank may withdraw it if your credit rating changes or it's not put to work for some time.

Merchant cash advances

If you take out a merchant cash advance, you’ll borrow a fixed sum and pay the money back through a percentage of your customer’s card transactions. Essentially, you’re advanced cash against your future sales through your card processor. 

Invoice finance

With invoice financing, you don't wait weeks for your invoices to be paid because lenders will immediately advance you most of the value. This means you get paid faster for completed work, leaving you to focus on running your business.

Asset-based finance 

Asset-based lending is a way for you to increase cash reserves, improve the overall bottom line and avoid cash flow problems by leveraging business assets such as accounts receivable, inventory, equipment, machinery or real property. The amount you’re eligible for is based on the value of the asset being used as security. 

 We've outlined many practical ways in which you can avoid or alleviate temporary cash flow issues. However, we realise that some businesses may require additional funding.

Funding Options has been chosen by the government-owned British Business Bank as a designated platform to find finance for businesses. Start your funding journey with us to see how much finance your business could receive.

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Joe Morley
Joe Morley

Head of Unsecured Lending

Joe has worked in the alternative lending space since 2015. During this time he has helped hundreds of SMEs access millions in essential funding ranging from long-term asset-backed lending to short-term unsecured revolving credit lines and beyond. In his role, Joe manages and supports a large team of Credit Finance specialists.

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