What are the effects of poor cash flow in business?

Your cash flow is how money moves in and out of your business. Money coming in is inflows, and money leaving is outflows. Monitoring your cash flow is key to running a successful business since it allows you to stay informed about its financial health. As good cash flow helps your business grow, poor cash flow could mean it’s in trouble.

This guide will help you identify and overcome the most common poor cash flow effects. We’ll cover the following:

• What the main poor cash flow effects are on your business
• How to identify if you have any cash flow problems
• How to solve any issues you may have
• How Countingup can help

Below we’ve listed the main effects poor cash flow can have on your business:

One of the main effects of poor cash flow on your business is that you may need to pass on opportunities because you don’t have the means. For example, you may have a chance to expand your service offering, but you can’t afford to buy the equipment you need. Or maybe a supplier has a limited special offer on their highest-quality products, but you don’t have enough money to pay for it.

Poor cash flow can also prevent you from paying your suppliers and other creditors on time. In addition, failing to meet your credit deadlines can damage your relationships with these companies. As a result, you might receive poor service or lose the business altogether. 

If your cash flow is poor, an effect it may have on your business is unnecessary stress about when customers pay your invoice. As a result, you may need to chase them about payments just to make ends meet, which could irritate them if you call too many times.

Money problems cause stress for all of us, and this anxiety can feed into all areas of your life and business. Unfortunately, if you’re stressing about money, you could make poor decisions for your business, such as taking out an additional loan and increasing your debt.

The most damaging poor cash flow effect is preventing your business from being successful. Your business can’t grow if you don’t have the resources to fund it. Going in the other direction, poor cash flow could force you to close up shop if you can’t fix the issues.

Thankfully, there are ways you can tell if you have poor cash flow problems. We’ve listed some indicators below and how you can fix them.

Asking for money is never pleasant, whether it’s asking a friend for the £30 they owe you for a meal or a customer failing to pay an invoice. However, customers failing to pay you within an acceptable time frame is an indicator of poor cash flow you’d be wise to look out for.

There are a couple of ways you can prevent late payments, including:

• Invoice immediately. The sooner you send your invoice, the quicker you can get paid. If you give customers 30 days to pay an invoice, make sure those 30 days start right away. Countingup’s simple app helps you create and send invoices on the go in seconds, so you don’t lose any time.
• List payment terms on your invoices. Ensure your customer understands your credit payment terms, including when and how you expect to get paid. For example, “payment due within 30 days via bank transfer or PayPal”. 
• Have an efficient and organised credit control process in place. For example, send a reminder email a day or two before the due date and call them on the day the invoice is due to remind them politely. Find out more about credit notes and how to issue one.

If you always pay owed money to suppliers before you get paid for your own work, it could indicate poor cash flow. All businesses have to balance their inflows and outflows, which is essential to maintaining a healthy cash flow ratio.

Make sure you comply with your supplier’s payment terms but avoid paying your invoice if you don’t have enough money for it. It’s better to wait for customers to pay you first to keep funds from leaving your business too quickly. 

Another indicator of poor cash flow is that you’re not making as many sales as you need to keep your business afloat. A good pricing strategy is key to maintaining a healthy cash flow. After all, you need your prices to be low enough to encourage customers to buy them, but high enough to help cover your expenses and hopefully make a profit. 

Take a look at which of your products sell well, and make sure you always have them in stock. You can also sell less popular items at a discounted price to get rid of them and boost your cash inflow. 

Another warning sign that your cash flow is poor is if your financial records are inconclusive, meaning they don’t add up. To manage your cash flow effectively, you need to know exactly how much money you have and how much you need to keep the lights on.

Take a good look at your finances to see when and where money enters your business and what you typically spend money on. Can you cut back on any costs that will help you improve your cash flow? Maybe you can negotiate a deal with a supplier or switch to a cheaper power company. 

Another way is to use the Countingup app to record your receipts on the go. Countingup has several features that will come in handy for improving your cash flow. See more below.

With a Countingup business current account, you can swiftly manage all your financial data in one simple app. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. 

You’ll receive real-time insights into your cash flow, profit and loss reports, tax estimates, and the ability to create invoices in seconds. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward!

Find out more here.