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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless.The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each.The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand.
See full bioLast editedSep 2021 — 2 min read
While it’s sometimes confused with profit, cash flow refers to all the money flowing in and out of your business accounts. Your business may look profitable on paper with steady growth, but if your funds are all tied up in inventory or stock you may still have trouble paying the bills. Dealing with cash flow problems early can keep your finances in balance.
Signs of cash flow problems
Before we discuss how to fix cash flow problems, it’s first important to learn how to identify them. If your business experiences any of the following situations, it could indicate a problem with your cash flow.
You have high accounts receivable with numerous unpaid invoices.
You’ve extended the business at a rapid rate and tapped out cash reserves.
Your business has a low volume of orders compared to its inventory.
Sales are declining due to competition, the economy, or outdated technology.
Lagging sales and unpaid bills all lead to stormy waters and trouble with cash flow, but fortunately there are several steps you can take to right the ship. 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. Use automated accounting software to send invoices out as soon as you’ve provided goods or services to a client. Submit automated payment reminders to chase up on overdue bills. You can encourage clients to pay on time by putting your payment terms in writing on the invoice. Net 30 terms should help keep the money flowing into your account.
2. Reduce unnecessary expenditure.
If your outgoing expenses outweigh your incoming sales, it’s time to reexamine your day-to-day business expenses. Some overhead costs are unavoidable, such as utility bills and rent. However, you might be able to negotiate more favorable terms to better manage cash flow. You should also track every little expense carefully to see where you can cut corners, from marketing to petty cash.
3. Manage your inventory.
Perhaps the best way to avoid cash flow problems is with inventory management. Is your business sitting in a warehouse full of unsold stock? This indicates that your sales plan needs reconfiguring. A better-managed inventory plan ensures that you purchase and retain the same amount of stock that you need to sell.
4. Be smart with credit.
Whether you’re scaling up or just need a quick infusion of cash, you might turn to a lender for help. A line of credit can certainly help if you’re dealing with cash flow problems. However, be sure that you’ll be able to repay the debt, or it will just end up as another bill you’re struggling to pay. A positive example of using this method would be to take out a short-term loan when you’re waiting for a large payment from a reliable client. You’ll have the short-term cash you need to better manage cash flow, knowing you can pay the debt once the payment has been received.
5. Use cash flow forecasting
In addition to inventory management, the best way to avoid cash flow problems is with sensible, realistic forecasting. A cash flow forecast involves setting up a spreadsheet showing your anticipated revenue and expenses, side by side. You should make this up every month to stay on top of your finances and anticipate future incomings and outgoings based on seasonal and economic trends. There will be unique cash flow forecast problems and solutions, so break these into best-case, worst-case, and middle-of-the-road scenarios.
How to fix cash flow problems: the bottom line
By identifying cash flow forecast problems and solutions, you can devise realistic options to manage your accounts. When it comes to determining how to solve cash flow problems, the answer will be different for each business. For some companies, chasing up on payments more effectively will be enough. Others will need an entire overhaul of their business plan. With cash flow forecasting, you can get a birds-eye view of where the problems lie to find appropriate solutions.
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