Top 3 causes of cash flow problems in SMEs and how to solve them

Posted by Rob Kendal on 08-Oct-2015 10:16:00

A common reason why a business might not succeed is because of poor cash flow. It sounds simple on the surface: you need more coming in than you have going out. But, like most things this is the tip of the iceberg and there are a lot more factors involved in assessing where your cash flow has gone off course and how to steer it true again.

In this article, we'll examine the 3 of the top causes of cash flow problems in small to medium enterprises and some ways to turn things around, pushing that red into the black!

Whilst this isn't an exhaustive list, it features 3 of the most common cash flow problems facing SMEs today and some simple advice that you can follow to correct them.

1. High expenses and overheads

Probably the king amongst common causes of cash flow problems is high overheads, or costly outgoings. Much like a personal / home budget, it might be that they're more geared towards fixed amounts, such as office rent, utlities, software subscriptions and licensing, but they might also be more fluctuating such as travel, accommodation, and networking meeetings. 

Fixed expenses prove somewhat easier to plan for as they rarely change and not usually by much if they do. More variable expenses, however, can cause problems month to month depending on who has spent what where and when. 

The problem with high expenses is that they require a higher monthly sales target to be able to cover them; a few slow months can easily tip a healthy bank account balance into cash flow hell!

As your company grows, you will most likely struggle to keep a keen eye on expenses as well as maintain control over other aspects of your business. 

How to fix it

Wouldn't it be great if it were just as simple as 'reduce your overheads'?! Well, whilst that is the end goal, there are a number of ideas you can try to help keep your overheads to a minimum and boost your cash flow:

  • Set limits on variable expenses where possible, and offer approved company vendors for things such as buying travel tickets
  • Negotiate with current suppliers to get a better rate, or perhaps shift to a different product / service level that's more cost effective
  • Change vendors - if negotiation doesn't work, can you move suppliers to a more cash flow friendly one?
  • Look around the office for where you can make savings - from small things like the brand of coffee, to larger items such as the type of office lighting you use (for example, LED lights are usually far cheaper to run and better for your employees' eyes!)

Image showing cash on a table and the title to our blog post on solving causes of cash flow problems2. Slow paying invoices and poor invoice collection

Slow payments and outstanding aged debt is a huge cause of cash flow problems to SMEs and one that should be addressed sooner rather than later. 

There are some ironic situations in business, especially when it comes to small business. One of those is the situation you can find yourself in when you've invoiced clients for a ton of work, only to find that all those invoices don't get paid for sometime. 

In the meantime, you're still liable for your expenses, overheads, and staff costs, Some businesses end up actually out of business because of waiting for payments from their clients. 

Discussing money and asking for it where it's due can be an awkward and uncomfortable subject for some companies, especially given the common British attitude that talking about money is almost taboo, but it's important to recognise that by delaying payments, your debtors can cause real problems to your businesses.

How to fix it

Whilst there isn't any one glaringly obvious way to help turn around slow paying clients and outstanding invoices, there are a number of things you can implement to get paid sooner and recover outstanding debt you're owed:

  • Reduce your payment terms - it may sound like a small thing, but by reducing your default payment terms from, say, 30 to 14 days effectively halves the time you have to wait to a) be able to follow up on outstanding payments, and b) to start recovery proceedings if things take an unfortunate turn
  • Introduce more efficient invoicing systems, or invoicing automation - by switching your accounting or invoicing package you will be able to automate any invoice chasing work at set intervals and make payment options much more attractive to customers. For example, we use Zoho Books at Red Guerrilla as it helps us track payments; takes care of chasing invoices and overdue notices; and allows our customers to settle their invoices online, with a credit or debit card!
  • Be firm but fair and start introducing penalties for bad debt - no one likes to have to put on their assertive hat, but unfortunately some people work better with sticks than carrots. If you have a persistent late payer, then as soon as their invoice slips past due, either start charging interest or down tools on their project until any invoices are settled.
  • Know your customers and invoice as soon as you can - if you've worked with a number of customers for some time, you'll likely have a good idea of how they operate and which ones will be slow payers. Make sure you invoice them as soon as you are able and this will increase your chances of being paid on time, or at least sooner.

3. Low sales figures - i.e. not enough customers

It might be that the cause of your cash flow problems is simply that your sales figures are too low. There is no immediate quick-fix to this, but there are a few solutions to this particular cash flow problem that should see you back in the black in no time.

How to fix it

The trick here is to increase your sales or introduce higher margins.

You can try the following approaches:

  • Boost your sales leads. This might be by looking for lead generation companies, it might be by implementing a more effective marketing campaign or methodology (like inbound marketing) in order to increase the quality of your leads.
  • Understand your audience. Perhaps you're not currently reaching the right audience or targetting them as effecticely as possible. By profiling your target customers you'll be able to sell to them more easier as you will have a better understanding of their needs, 
  • Increase prices on high-margin products and services
  • Encourage customers to switch to a higher-value product or service, or perhaps offer complimentary items to boost your overall sales package

What now?

Cash flow problems can be a major problem and threaten a business' ability to keep trading. However, caught early enough, you should be able to put a solid plan of action into force that will put you back on the right path. Talk to your accountant, or find a qualified financial expert to help you develop a positive cash flow plan.

If one of your cash flow problems happens to be poor quality leads, or lack of customers, maybe you should try a different approach to marketing, or try out some new ideas to drive customers to your door. 

That's why we're offering our ebook, 'The 30 Greatest Lead Generation Tips, Tricks & Ideas', absolutely FREE, to help you get off on the right foot. 

Download our free business lead generation ebook today

Topics: Lead Generation B2B Sales

Written by Rob Kendal

Rob has enjoyed a rewarding career in technology, from IT infrastructure through to software development, working with clients such as Virgin Holidays and the NHS. He understands the needs, challenges and logistics involved in making technology work for business and how to market it effectively.
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