Get Started Today

Please fill out the form below and a member of our
team will be in touch with you soon.

    hero image

    Why do SMEs struggle with cash flow management?

    Are you a business owner struggling to achieve a positive, consistent cash flow? In the current economic climate, issues with cash flow can seriously hinder SMEs ability to grow, and ultimately, operate.

    According to research*, a quarter of SMEs are at risk of serious cash flow problems as they do not have basic cash flow projection processes in place, with 37% of business owners citing cash flow as a concern, a 14% increase from 23% in January 2021.

    In our latest blog, we look at seven common reasons why SMEs may find cash flow management challenging.

    Late payments

    Late payments can be hugely damaging for SMEs. A recent Xero study confirmed that 55% of large organisations admitted to paying their small business suppliers later than the agreed payment terms in the last 12 months. Further research from Simply Business found that 65% of all SMEs admit that late payments from customers are a problem for them.

    So, what can SMEs do to improve late payments? If you are consistently waiting for payments to be made, it will become increasingly difficult for you to run your business sustainably, especially if you don’t have the cash reserves.

    There are various strategies you can implement to assist with late payments, including:

    • Attaching electronic payment methods to your invoices
    • Discounting invoices if early payment is made
    • Utilising invoice automation software, such as Chaser, to help recover the debt quicker
    • Use Capitalise for Business to monitor your debtor book, credit check the companies you work with and flag debtors – giving you the insights you need to improve your working capital position

    Increasingly high overheads

    The current cost of living crisis is causing many issues for small businesses, from rising inflation to high energy prices, and many businesses could benefit from reviewing their expenditure to operate more effectively.

    Managing increasing overheads is crucial to ensure long-term sustainability and profitability. To effectively address this challenge, businesses can adopt a strategic approach that focuses on optimising operational efficiency while maintaining the quality of products or services:

    • Conduct regular cost-benefit analyses
    • Utilise Futrli Predict to carry out scenario planning
    • Embrace technology and automation to streamline processes, reducing the need for manual labour

    Rising costs

    The Bank of England recently announced the current inflation rate has dropped to the 2, but the cost of running a business is showing no signs of slowing as rent, wages, utilities, and admin costs, amongst many other things, continue to increase.  Research shows that 81% of small business owners are worried about how the cost-of-living crisis is affecting their business, and 65% see rising costs as their biggest challenge – so, what can you do to ensure you survive, and thrive, in the current economic climate?

    SMEs must remain firmly focused on their cash flow. Work with your accountant to identify opportunities to reduce costs, whilst retaining the finance needed to achieve your business objectives.

    Expensive debts

    Most SMEs rely on loans in some way to set up the business, whether that’s from a bank, digital lender, friends, or family. However, borrowing can become a problem if you are struggling with repayments, whether this is due to the business performing less well than expected, or because of rising interest rates which are out of your control.

    The current economic landscape means that seeking capital is becoming more and more expensive, as is paying it back, which may mean that SME owners are reallocating valuable working capital to repaying debts. If this is the case, and you’ve borrowed more than you are bringing in, there may be cash flow issues on the horizon which need addressing urgently.

    Our partnership with Capitalise means that we can help businesses monitor and boost their cash flow, obtain access to funding and ultimately, reduce risk. Click here to speak to us and find out more about the importance of monitoring your business credit score, and our partnership with Capitalise and the credit review scheme which will help you take control of your finances.

    Unnecessary stock

    Recent global supply chain issues, such as Russia’s war with Ukraine, may have caused many SMEs to purchase excessive stock, in fear that unreliable supply chains will be unable to fulfil demand. While this approach is understandable, there are certain pitfalls which should be considered including the cost of storage for excessive stock, increasing freight costs, as well as the risk that customer demand may fall, and you will be left paying to store stock which cannot be sold.

    Overstocking can lead to significant financial repercussions that can harm the bottom line. To avoid this costly pitfall, businesses can implement a few key strategies:

    • utilise accurate demand forecasting models to obtain valuable insights into customer behaviour and help optimise inventory levels
    • adopt a just-in-time approach to minimise excess stock while ensuring timely restocking when needed
    • regularly review stock turnover rates and implement efficient inventory management software to help identify slow-moving items early on
    • Work with your accountant – our cloud accounting team can help by making recommendations for up-to-date KPI reporting for stock turnover, whenever, wherever you need it.

    The ongoing effect of Covid-19

    Although to many, the pandemic seems to be firmly in the past, SMEs are still affected by the ongoing fallout from Covid-19.

    During the pandemic, government support meant that schemes such as the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) were widely used, and acted as vital lifelines for many businesses. However, now Covid-19 is a distant memory for some, SMEs are still facing the prospect of repaying the loans which provided the cash injection when they needed it, but now may cost more than can be repaid.

    If your business is affected, prioritise:

    • open communication with lenders and options for loan repayment flexibility
    • diversifying revenue streams and operational efficiencies to help generate additional funds for loan repayment, with options such as refinancing or debt consolidation to manage the overall cost of repayment
    • embracing digital transformation – the PM+M cloud team can work with you to revolutionise your accounting procedures, digitise your processes and help you convert to cloud-based accounting – supporting you and your business to work smarter and more efficiently, saving time and money
    • innovative marketing strategies to help your business grow in uncertain economic conditions – know your customers, take advantage of social media, and look for new opportunities to embrace resilience and continuously adapt, evolve and grow.
    • Utilising apps such as Capitalise for Business to monitor, track and boost your business credit score, manage your cash flow and mitigate risk

    Insufficient cash flow forecasting

    Many SMEs struggle to maintain a positive cash flow due to inadequate cash flow forecasting processes. If you are business owner who is struggling to keep track of your bookkeeping and financial statements, there is no way to predict what will happen in the future.

    Already on cloud-based accountancy software? Our cloud team can help build your forecasts and scenarios and give you access to platforms to help aid your decision making. Utilising tools such as Futrli Predict can ensure you have a full picture of the financial health of your business, whenever you need it.

    Capitalise for Business can also help you by tracking and improving your business credit score whilst obtaining access to over 100 UK lenders, and can be used as a credit check service for customers and suppliers too – a handy tool to manage your business finances in one place. We have a number of free credit reviews available – take advantage of this valuable offer to review your current score, check its accuracy and find areas to potentially improve it.

    Find out more about Capitalise for Business by clicking here to watch our recent webinar.

    Get in touch

    If you are concerned about your cash flow, and want to find out more about how we can help you mitigate risk and ultimately, achieve your business goals, get in touch with cloud accounting director, Rosie Cooper, by clicking the button below.

    *Capify research – a survey canvassing the insights of hundreds of SME business owners from across the UK on areas of business performance, outlook, and investment intentions.


    Simply Business survey of over 600 small business owners

    profile image
    For more information about anything in the above article, please get in touch using the button below.
    Rosie Cooper
    Stay Connected