Five Cash Flow Issues Every SME Should Know About
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Five Cash Flow Issues Every SME Should Know About

One of the most important aspects of running a healthy business is to ensure that there is good cash flow. Doing so can ensure that unexpected costs or blips in the road can be navigated without it affecting day-to-day operations or your ability to pay staff, suppliers or any other essential running costs. This is the case whether you’re a start-up or an established SME and failing to make cash flow a priority can have very serious consequences for any business if something does go wrong, especially over a sustained period of time. Some of these problems can include:

  • Affecting the ability to pay staff in full and on time
  • Affecting the ability to promote staff/increase pay
  • Affecting the ability to take on new projects that have an initial outlay
  • Affecting the ability to grow or invest in key areas of the business

Research by Intuit Quickbooks indicates that 60% of small business owners have problems with cash flow, with the same survey showing that cash flow is one of the top causes of stress for 76% of small business owners with several different causes for these issues. In this article, we outline some of the common cash flow problems that all SMEs should be aware of and how you can take steps to mitigate them.

Small business finance: Common cash flow issues

There can be a range of reasons why cash flow starts to become a concern and it is often a combination of more than one cause. These can include:

1.     Decreasing sales or margins

Most businesses have seasonal peaks and troughs when revenue can fluctuate, depending on market demand, but there can sometimes be other reasons for decreasing sales or your margins being reduced. Perhaps you have increased competition in the market which undercuts your usual pricing; this can result in both losing business to the competitor as well as a decreased margin if you drop your prices to compete. Another reason could be an increase in supplier costs that you can’t or won’t pass on to your customers/clients, which means that your profit margin is reduced to swallow this cost.

2.     Not receiving payment in accordance with your terms

Not being paid on time can put a big strain on an SME cash flow, especially if it happens with a number of customers or clients at the same time. Every business tries to budget according to what should be coming in and going out of the business during a given timeframe, so late payments or non-payment can have a huge impact on this and have a knock-on effect on cash flow available for the day-to-day running of the company.

3.     Cash reserves are too small

It’s generally considered good business practice to keep cash reserves of at least three to six months of operating costs and expenses so that the business has enough money to get through any short-term blips or challenges. However, with a longer-term problem that means a reduced income over a sustained period, or if costs also rise during this timeframe, it can easily be the case that cash reserves simply aren’t enough for the business to continue as normal.

Government research indicates that as of March 2021, just 37% of businesses of any size had more than six months’ cash reserves. Even when a business has overcome one problem, building up those cash reserves to an appropriate level again can take time and leave businesses vulnerable if another issue hits before they manage to do so.

4.     Unexpected cost increases

While some business costs are easier to predict and budget for than others, some are more prone to market influences, such as, for example, the recent hikes in energy costs. Businesses are often not covered by the same legislation that can help protect consumers, which can lead to vulnerabilities in the area of price increases across many areas, not just energy bills.

The current shortage in HGV drivers, for example, could also have an impact on delivery costs, which can’t be passed to the customer, as well as affecting availability and potentially increasing demand. These pressures can eat away at cash reserves until real-time cash flow is affected.

5.     Growing too quickly or at the wrong time

Business growth is rightly seen as a positive sign in many cases, and many UK SMEs are planning to grow their business in the near future, but it’s important that it’s done in the right way and at the right time for the individual company.

Growing a business can mean many different things, but generally it encompasses taking on more staff (and the associated costs of this) and may also mean taking on new premises, purchasing new equipment and other expensive kinds of outlay. Even if this growth comes in response to a new contract or a ‘guaranteed’ increase in work, there are usually significant costs that need to be covered by the business before there is any return, which can put a major strain on cash reserves and cash flow if not managed effectively. Miscalculating the growth needed or over-extending in order to meet demand that is short-lived can be a real problem in small business finance management.

Ways to mitigate cash flow problems for small businesses

Having a solid cash flow plan is essential for every business, both to build an initial reserve and then to maintain this as needed, alongside planning growth and investment when required. However, even the most well-informed, careful and well-run businesses can face unprecedented issues, such as a global pandemic or unpredicted market influences, for example, and may need to find a way to manage cash flow challenges along the way.

Are SME business loans the answer to cash flow problems?

For some small businesses, who need an injection of funds to help them manage a temporary cash flow issue, SME business loans from a trusted provider could be a good option. It’s important to look at whether a business loan is right for your organisation’s cash flow problem, and ensure that the repayments are structured in a way that works for your company.

You can check your eligibility for a loan from Capify in just 60 seconds and take a look at our FAQs if you want to find out more and how we differ from bank loans or other types of small business finance.