4 Common Cash Flow Problems And Its Causes - Velotrade (2024)

4 Common Cash Flow Problems

Cash flow issues are inevitable.

A business undergoes a cash flow problem when its cash outflows exceed inflows.

With a host of cash flow challenges, below are four common reasons why a business might be struggling:

  1. Late Payments from Buyers

This is one of the biggest cash flow issues affecting businesses.

As businesses need to pay expenses, a delayed payment reduces cash inflows while adding pressure to pay bills on time.

Businesses might be falling in a vicious cycle of inability to make payments (suppliers, loans, salaries) that may cause them to collapse.

Late Payment Culture

Late payment phenomenon is a significantly growing trend in the US and the UK.

The US receiving the largest value of invoices was the worst late payer in 2019. US companies take an average of51 days more to settle invoicesto UK firms.

Overall, 43% of invoices were paid late by UK companies.

These late payments vicious cycle has a crippling effect on the supply chain.

On a study done by Nexus,51% of suppliersclaim that they received more late payments in 2021 compared to previous years.

However, Previse revealed that businesses tend to pay their smaller suppliers30 days laterthan their bigger counterparts.

A study conducted by theFSB in the UKshowed that nearly 50,000 SMEs close each year due to slow payments!

This has caused SMEs to:

  • Delay Hiring 40%
  • Delay Inventory Purchase 39%
  • Cut Employee Hours 36%

4 Common Cash Flow Problems And Its Causes - Velotrade (1)

The impact of late payments on small medium enterprises.

The primary reason behind this is cash flow issues faced by buyers.

Poor cash flow is one of the biggest killers of small businesses. In a survey conducted by the US bank, a massive82% stated cash flow problemsas their major reason for business failure.

Was it not for these delays, businesses could invest this money to grow and repay debts more quickly.

It is essential for businesses to know how to tackle late payments to avoid recurrence of such delays in future.

  1. Insufficient Cash Reserves

While a major problem is cash shortage due to delayed or no cash inflows, another is not having enough cash to battle this shortage.

Cash reserve is an essential safety net that gives your business cushioning against unprecedented or unexpected circ*mstances.

However, many businesses struggle to maintain a good cash reserve to sustain during low cash inflow periods.

Based on a JP Morgan Chase study, SMEs manage to have an average of only27 cash buffer daysto cover their cash outflows if their cash inflows were to stop.

4 Common Cash Flow Problems And Its Causes - Velotrade (2)

The avg. number of days a business could pay out of its cash balance if cash inflows were to stop.

To find out how many cash buffer days your business has, use the below formula: Cash Balance divided by Cash Outflows equals to Cash Buffer Days.

4 Common Cash Flow Problems And Its Causes - Velotrade (3)

Cash Buffer Days equals to cash balances divided by cash outflow

What’s more is that47% of small businesseswould need to resort to their personal funds were they to face a two-month loss. Also, 17% of whom say so, would need to close their business.

Insufficient cash reserves is a serious cash flow problem and businesses must learn to save cashto avoid bankruptcy after all cash adjustments have been made.

  1. Inventory Overstock

It is always good to have extra inventory supply as a buffer to meet unexpected surges in demand. This is important for better inventory control that helps avoid stockout costs.

However, an overstock is a sign of poor inventory management and slow business growth.

Excessive inventory can slacken cash inflow and lower liquidity. This may leave the business with ample cash tied in tangible assets which could otherwise generate revenue.

Inventory management is particularly a problem for retail businesses whose products are tangible assets.

  1. Urge for Rapid Business Growth

Who doesn’t want quick growth and expansion?

Oftentimes, the more you want to grow = the more you must spend to run a business.

This includes additional overhead costs, such as:

  • hiring new employees
  • increasing inventory investment
  • improving technology and infrastructure
  • outsourcing

Businesses often underestimate how growth affects cash flow.

B2B sales are often made on 30-90 days payment terms. As deals grow, the business has more sales tied in accounts receivables.

While companies wait 1-3 months to get paid, suppliers and other expenses must be paid either upon receipt or by month-end.

This causes cash flow problems to escalate quickly.

One must understand and manage financial and other business risks properly, or else it will be difficult to make ends meet with limited debt-paying ability.

4 Common Cash Flow Problems And Its Causes - Velotrade (2024)


What are the most common causes of cash flow problems? ›

5 Biggest Causes of Cash Flow Problems
  • Avoiding Emergency Funds. Businesses — like individuals — need to be prepared for the unexpected. ...
  • Not Creating a Budget. ...
  • Receiving Late Customer Payments. ...
  • Uncontrolled Growth. ...
  • Not Paying Yourself a Salary.
May 3, 2023

What are cashflow problems? ›

What is a Company Cash Flow Problem? A cash flow problem occurs when the amount of money flowing out of the company outweighs the cash coming in. This causes a lack of liquidity, which can inhibit your ability to make payments to suppliers, repay loans, pay your bills and run the business effectively.

Which of the following is a common reason for cash flow problems? ›

fail to put enough money aside to cover taxes (e.g. VAT or GST) fail to forecast and budget for their future costs effectively. fail to budget properly for materials costs and fixed costs on client projects. fail to negotiate favourable payment terms with suppliers.

What are the causes of cash flow problems and solutions? ›

Some common causes of cash flow problems are poor management, making a loss, and offering customers too long of a term to pay. The methods of solving cash flow problems include rescheduling payments, using an overdraft, cutting costs, and finding new sources of cash inflows.

How do you identify cash flow problems? ›

Here are some common signs that your business may be experiencing cash flow problems:
  1. Difficulty paying bills on time: This is one of the most obvious signs of cash flow problems. ...
  2. Negative cash flow: A negative cash flow statement means that your business is spending more money than it's bringing in.
Oct 30, 2023

What are the 5 principles of cash flow? ›

The five principles that form the foundations of finance cash flow are what matters, money has a time value, risk requires a reward, market prices are generally right, and conflicts of interest cause agency problems are discussed in the media.

What are the three 3 major types of cash flow? ›

Question: What are the three types of cash flows presented on the statement of cash flows? Answer: Cash flows are classified as operating, investing, or financing activities on the statement of cash flows, depending on the nature of the transaction.

What are the three 3 main components of cash flow? ›

A company's cash flow is the figure that appears in the cash flow statement as net cash flow (different company statements may use a different term). The three main components of a cash flow statement are cash flow from operations, cash flow from investing, and cash flow from financing.

How do you fix cash flow problems? ›

How to solve common cash flow problems
  1. Revisit your business plan. ...
  2. Create better business visibility. ...
  3. Get better at forecasting. ...
  4. Manage your profit expectations. ...
  5. Minimise expenses. ...
  6. Get good accounting software. ...
  7. Try not to overextend. ...
  8. Try to get paid quicker.
Dec 23, 2022

How to avoid cash flow problems? ›

11 ways to avoid cash flow problems
  1. Create a cash flow forecast.
  2. Invoice promptly.
  3. Ask large creditors for an extension.
  4. Reduce expenses.
  5. Increase your prices.
  6. Understand business credit cards.
  7. Improve your profit margin.
  8. Get imaginative with selling.
Dec 8, 2022

What is an example of a cash flow risk? ›

In the case of market conditions, typical cash flow risk examples could include an economic downturn and its knock-on effects. During times of downturn, lenders raise interest rates and customers tighten their belts. If a small business doesn't have assets to liquidate, this can lead to negative cash flow.

How do you stop cash flow problems? ›

Here's how to solve cash flow problems.
  1. Track all incoming payments. To solve the problem of a high accounts receivable, you need to get on top of your payments system. ...
  2. Reduce unnecessary expenditure. ...
  3. Manage your inventory. ...
  4. Be smart with credit. ...
  5. Use cash flow forecasting.

What is one solution to cash flow problems? ›

Consider invoice factoring – If you're in need of a short-term cash infusion, invoice factoring could be one of the most effective solutions to cash flow problems for your firm to explore.

What is a major deficiency of the statement of cash flows? ›

A major deficiency of the statement of cash flows is that it doesn't explicitly consider non-cash transactions.

Top Articles
Latest Posts
Article information

Author: Prof. Nancy Dach

Last Updated:

Views: 5859

Rating: 4.7 / 5 (77 voted)

Reviews: 92% of readers found this page helpful

Author information

Name: Prof. Nancy Dach

Birthday: 1993-08-23

Address: 569 Waelchi Ports, South Blainebury, LA 11589

Phone: +9958996486049

Job: Sales Manager

Hobby: Web surfing, Scuba diving, Mountaineering, Writing, Sailing, Dance, Blacksmithing

Introduction: My name is Prof. Nancy Dach, I am a lively, joyous, courageous, lovely, tender, charming, open person who loves writing and wants to share my knowledge and understanding with you.