Common cash flow problems (and how to solve them)

“Turnover is vanity, profit is sanity, but cash is king.”

Have you heard this phrase?

You can be profitable on paper, but if you’re cash poor, you can soon find yourself in danger of losing your business.

More than 63% of Australian small businesses have experienced cash flow issues in the past year. But cash flow problems don’t just exist in small businesses, it happens to businesses of all sizes. In this article, we cover three common cash flow problems and what you can do to overcome them.

Cash flow problem #1: A lack of visibility over your cash flow

Understanding your business’ cash position is critical to not just surviving, but thriving. Performing a cash flow analysis will give you an oversight of the money coming into and flowing out of your business.

How to solve it

Assessing income, assets, and expenditure, your analysis should include:

• Operational activities: Cash coming in from day-to-day sales and the outflow of funds to cover those activities, for example, payroll, supplier payments and taxes;

• Investment activities: Assets such as buildings or equipment – the purchase and sale of them – can have a drastic impact on a business’ cash flow;

• Finance activities: Business borrowing, issuing stock to shareholders and distributing dividends all fall into this category.

Once you understand what's coming in and going out each month, you will be able to see if there are any shortfalls in your income to cover your business' liabilities. This visibility will help you make adjustments to your business structure to improve its health and overall cash position.

Cash flow problem #2: Not getting paid on time or quick enough

Have you found your business needs short-term business credit to survive each month? Do you find that you fall into an overdraft for a certain amount of time while you wait for invoices to be paid by your customers? Do you ever worry about exceeding your allowed overdraft? Do you worry you won't be able to pay your own bills while you're waiting to receive payment from your customers?

How to solve it

The first step to improving the payment speed is invoicing your customers promptly once you’ve completed work for them. Also equally as important is ensuring you have access to the most up-to-date information about the customer’s order, account balance and payment history at any given time. That way, if a customer gets referred onto a specific person or department within your business for immediate payment, it will save the back and forth on finding the relevant records to process that payment efficiently.

Having an efficient invoicing system can help with this; so you can always have detailed customer information and payment reporting at the ready.

Wherever possible, keep your payment terms as short as realistically possible; you could also consider incentivising your customers to pay earlier by offering a discount on their invoice for doing so.

There is also the option of charging penalties or interest for late payments. This should be included in your payment terms before you start working with a customer to ensure you don’t get tripped up legally. Ensure that your invoice clearly states the payment due date and payment terms, along with a clause regarding the interest due if payment becomes late. The interest rate must be reasonable — we suggest no more than 10% annually.

Read more: How to get your customers to work with your invoicing terms

Finding ways to automate payments not only makes your cash flow more predictable, but also takes the hassle of chasing late payments away from your accounts team. Direct Debit is one of the easiest and safest ways for your customers to pay. Whether it's a regular payment for retained services or larger invoices split into agreed monthly payments, using Ezidebit’s paperless Direct Debit service reduces the risk of late payments, improves your business' cash position and enhances the relationship with your customers, as they have personalised payment schedules that are mutually beneficial.

Read more: How does Direct Debit work?

Cash flow problem #3: Struggling to stay on top of operational costs

When you have to pay your business’ bills but customers aren’t paying on time, it leaves gaps in your cash flow. Speeding up money coming in is one side of the coin to improving cash flow; the other is slowing down the money going out again.

How to solve it

Once you have reviewed your outgoing expenses, we recommend assessing your credit accounts to see where you can extend payment terms to ease the outgoing burden.

This doesn’t mean that you should pay your bills late or push for unrealistic terms. Still, if you’re paying pro forma for an account, it might be that a phone call or email will move you from paying upfront to having 30 days of breathing space. If you can improve this across some or all of your suppliers, it can have a dramatic effect on your cash flow position and make your business more robust financially.

Read more: Consulting business Revealed Resources has cash flow mastered

We’re here to help

Ezidebit takes the pain out of payments. Since 1998, we have worked with more than 27,000 businesses to process their payments. We take the complexity out of payments by offering a range of payment methods to make life easier for both businesses and their customers. We can simplify the way your customers pay you, improve your business' cash flow, reduce the burden of chasing late payments, and get time back for your accounts team to work on other, more productive areas of your business. Contact us today to get started.