Cash flow problems: the warning signs and what to do

Cash flow problems are a mismatch in timing: the money your business has to pay out falls due before the money it is owed arrives. The British Business Bank defines cash flow as the movement of cash into and out of a business, so a problem means that movement has gone out of step.

It is not the same as making a loss. A business can win work, invoice it and be owed a healthy sum, yet have too little in the bank on the day wages, rent and VAT are due. Our guide to what working capital is covers the cushion that is meant to bridge those gaps.

Most cash flow problems come from a long gap between paying your costs and being paid. The British Business Bank calls this the cash flow cycle: the time it takes to be paid after you have incurred the costs of delivering a product or service. The longer it is, the more capital the business needs.

• Slow-paying customers. Invoices sit unpaid while your own bills fall due on time.
• Stock bought ahead of sales. Cash is tied up on the shelf until the goods sell.
• Growth. Every new order means costs paid before the customer pays, so a fast-growing business can run short while sales rise.
• Seasonal takings. Income bunches into a few months while rent, wages and loan repayments run all year.
• Tax bills that were not planned for. VAT, PAYE and Corporation Tax have fixed deadlines whatever the state of the bank balance.
• Thin margins. If each sale makes little profit, one late payment can wipe out the buffer.

The Insolvency Service lists five signs that a company could be in financial distress, and the first three are cash flow signs. Many businesses ignore them, or remain unaware, until the problem is serious.

Two further habits are worth watching: moving money between accounts to cover the next bill, and paying yourself last to keep the business going. Neither is on the official list, but both mean the cushion has gone.

Yes. Profit counts a sale when you make it, while cash flow counts the money when it lands, so a profitable business can be short of cash whenever customers pay later than suppliers do.

Run several jobs like this at once and the gap multiplies. Our guides to debtor days and creditor days show how to measure how long customers take to pay and how long you take to pay suppliers.

You find out by building a cash flow forecast: a list of the cash you expect to come in and go out over a period, so you can see the low points before you reach them. Our guide to cash flow forecasts walks through one in full.

The British Business Bank sets out four steps:

• Choose a period at least as long as your cash flow cycle, which can be anything from a few weeks to many months.
• List all income, including sales and any non-sales income such as tax refunds or grants.
• List all outgoings, such as rent, salaries, materials, loan repayments and tax bills.
• Work out the running balance for each period, so you can see where it turns negative, and update it regularly.

The ICAEW notes that rolling, detailed weekly forecasts looking 13 weeks ahead are often used in turnarounds. If the bank balance is already under pressure, a weekly view shows the pinch points that a monthly one hides.

You fix cash flow problems without borrowing by moving cash in sooner and out later where you can do so fairly, because both cost nothing in interest.

• Invoice the day the work is done and chase on the day a payment becomes overdue.
• Put payment terms in contracts and on invoices, and ask for deposits or stage payments on larger jobs.
• Agree longer terms with suppliers that match how your own customers pay.
• Sell or reduce slow-moving stock, and order closer to demand.
• Delay non-essential spending, but never by missing tax or wages.

You also have rights when another business pays late. As GOV.UK sets out, you can charge statutory interest of 8% plus the Bank of England base rate and claim fixed compensation of £40, £70 or £100, depending on the size of the debt, unless your contract sets a different interest rate. Where no payment date is agreed, a payment is late 30 days after the invoice, or after delivery if that is later. Our guide to late payment interest explains how to claim it.

Finance can help when the gap is temporary and the business is sound, for example money waiting on invoices, and it does not help when the business is losing money, because borrowing then only postpones the problem and adds repayments.

Every option costs interest or fees and is subject to status and the lender’s criteria. Some are secured on assets, and a director may be asked for a personal guarantee. The lender directory groups providers by product, such as invoice finance lenders.

Talk to the people you owe before the due date, and take professional advice early, because options narrow once payments are missed. HMRC says that if you cannot pay in full and on time, it can work with you to find a way to pay that is affordable, and you should respond as soon as possible.

A payment plan, known as Time to Pay, may be possible if you cannot pay a tax bill in full, and HMRC will check it is affordable. Our guides to HMRC Time to Pay and what happens with HMRC debt cover the process.

The Insolvency Service suggests starting with your accountant, financial or business adviser. This is general information, not tax, legal or accounting advice.

Capzy is a credit broker, not a lender, and is paid by the lender. We introduce businesses to lenders that offer working capital finance and show what comes back so you can compare it. We do not give tax, legal or accounting advice.

You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria. If the underlying problem is losses rather than timing, finance is unlikely to be the right first step.