How to manage cash flow issues in business

One thing new business owners may not appreciate at first is the difference between revenue and cash flow.  

Take, for example, a situation in which you sell a large order to a customer on trade credit. You would recognise revenue at this point and likely be happy; however, the cash in the bank account may not arrive for another ​​sometimes 90 days (depending on agreed credit terms).  

This can put pressure on cash flow, as payments to suppliers and staff require cash in the bank, not revenue that should arrive in the future.  

It’s this disconnect between the agreement of payment in the future and then the need to make payments before then that often leads to cash flow issues.  

Other common cash flow problems to watch out for include: poor financial planning, late customer payments, overstocking on inventory, and not anticipating seasonal fluctuations.  

This is not a small problem. ​One widely quoted piece of research suggests 82% of business failures are due to poor cash flow management, highlighting the critical importance of maintaining a healthy financial position.  

Therefore, taking measures to ensure positive cash flow and prevent your start-up from running out of money is important

Read our guide on how to spot cash flow problems and solve them.

Spotting cash flow problems early

A cashflow problem usually shows up as a timing problem – money is due out before money arrives in.

Common warning signs include:

• you’re regularly waiting on late invoices
• sales dip in predictable quiet periods, but costs stay fixed
• large bills, such as VAT, rent, and supplier payments, land before your busiest weeks
• you’re relying on personal funds or maxing out credit to cover basics
• you don’t know what your bank balance will look like in 2–4 weeks.

It can be a good idea to build a simple cash flow forecast and update it weekly, so surprises become visible early.

Download our free cash flow forecast template.

5 tips for managing cash flow issues in business

Your start-up could take steps to help manage and protect cash flow.

1. Consider where appropriate shortening the time to receiving payment

Late payment is one of the most common causes of cashflow issues in business. Although some industries have longer payment cycles, where appropriate try and focus on reducing the time between booking revenue and receiving payment from customers.  

Ensuring you get paid quickly and on time could help manage your cash flow.

One way to do this could be to automate invoice processing, sending them as soon as a purchase is made, to minimise the time spent waiting for payment.

Accounting software could do this and send automatic reminders, which may reduce the time you spend chasing payments.

You could also speed up payments by offering customers several ways to pay, including online methods.

Online payment may make it easier for customers to pay with various credit or debit cards or through payment systems such as PayPal or Google Pay.

Ensure that your payment details are correct and clearly labelled on invoices to make it easier for your customers to pay.

Read our guide to creating customer invoices.

2. Audit your outgoings

Reducing unnecessary business expenses is one of the fastest ways to improve cash flow.

Consider starting with the biggest outgoings.

You might review areas like software subscriptions, utilities, office supplies, or marketing spend.

You could also consider cutting back on the amount the business uses, looking for cheaper alternatives, or renegotiating contracts.

Employee expenses could also affect cash flow, especially if spending rules are unclear.

It may be a good idea to require employees to clear purchases with you before making them so that you can keep an eye on expenditure.

You may also want to think about smaller things you could cut back on, such as office supplies.

You might consider flexible and hybrid working if these arrangements suit your business.

This may reduce the time employees spend in the workplace, thereby lowering energy bills and supply costs.

If effective working from home is possible, consider downsizing your business premises to a more cost-effective location.

You could consider switching your business model to an entirely remote one to reduce outgoings.

Read more about how to strengthen your cash flow.

3. Build cash reserves

Business income could be unpredictable in the early stages.

Employees could leave, equipment may need to be replaced, payments could be delayed, or you could lose a major customer – all of which could put unexpected pressure on your finances.

A cash reserve could help protect your business from unexpected circumstances, covering essentials such as wages, rent, and tax bills during tougher periods.

Even a small emergency fund could make day-to-day decisions feel less challenging.

You could build reserves gradually by putting aside a set amount each week or a percentage of each payment you receive.

4. Do financial forecasting

Thorough financial forecasting involves creating a cash flow forecast.

This is a way to predict the amount of cash coming in and out of your business over a set period.

A forecast could help you identify potential periods of negative cash flow before they happen.

It could also help you decide when to pause spending, push sales, or chase overdue invoices sooner.

You could keep forecasts simple by listing expected payments in and out by week or month, and updating your figures regularly as you learn more about your cash flow.

Download our free cash flow forecast template.  

5. Negotiate with your customers and suppliers

Suppliers may well need your business and so you could be in a position to negotiate better payment terms with them.  

Diversifying your supplier base is another option if that’s applicable to your industry and if the supplier is more reliant on your business for their income it should be easier to negotiate more favourable terms.  

On the flip side, look into getting quicker payment from your customers.

Together having better payment terms with suppliers and customers should help with cash flow.