Main reasons businesses can suffer from cash flow problems
Saturday 1st April 2023
It’s a commonly touted statistic that only a very small number, perhaps as low as one in ten new businesses succeed, and generally, this is as a direct result of cash flow problems.
However, these difficulties are not in fact unique to small businesses and start-ups at all - they can affect corporations of literally any size. Just about everyone from one-man brick-and-mortar sole traders to multinational publicly traded companies can suffer from cash flow problems.
In this article, we’re going to take a look at two of the main reasons why cash flow can be problematic even for companies that are otherwise profitable.
1. Late payments
The first one will be more familiar to smaller businesses, but that doesn’t mean that it can’t happen to large ones. Sales can be very strong indeed, and overheads manageable, but exactly when the money arrives in the right place can cause a real headache.
In a great many industries, payment terms are on 30 days rather than the instant receipt of money you might get in retail. Sometimes they can even be 60 days, and in many scenarios, the payment terms don’t matter a huge amount, because customers pay very late anyway. This can mean that on paper everything is going very well, and profits are fine, but when it comes to meeting overheads such as payroll, rent and debts, the money might not actually be where it needs to be.
This is often when large and small businesses alike have to consider their own credit options - which can be expensive - in order to remedy the situation. There are of course solutions that look to solve this problem, such as invoice finance, that removes the issue of when money arrives into the accounts. Either way, there is still a cash flow problem despite profits being good.
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2. Poor Cash Flow
The more pressing issue for larger and more profitable businesses however is that poor cash flow can hamper their ability to adapt to the market and make use of opportunities.
It’s often the case that the business that most swiftly takes advantage of market movements or new opportunities is the one that succeeds, and if your business doesn't have the cash available right there and then, even if very profitable, you can’t do this.
This often happens when it comes to mergers - sometimes it is a less profitable company (company A) that buys a more profitable one (company B), but because in this scenario company A has more cash available, they are able to take the initiative.
This is ultimately why debt isn’t always a bad thing; cash injections allow businesses to be more agile, make the best of situations, and ultimately become more profitable in the future. In fact, a great many big businesses, and indeed small but very profitable ones, operate extremely well with large amounts of debt because this allows them to be successful, and manoeuvre as they see fit.
The takeaway then, is that cash flow problems are certainly not just limited to those small and struggling companies. Very profitable enterprises can experience exactly the same difficulties, and have to try resolve them in a very similar way.
This of course means that cash flow, as the old saying goes, really is king, and that anything you can do to improve it, whether tactically taking out debts or liquidating certain assets, is likely to improve your business fortunes too.
