Poor cash flow is a factor in around 80% of business failures. Yet, many businesses struggle with it. So much so that, when we asked a group of finance leaders about their biggest challenges, 72.1% said it was cash flow management. And this was before Covid-19 kick-started what could become one of the biggest economic crises of our times.  

So why do many businesses find keeping healthy cash flow so difficult? And what can you do to balance your incomings and outgoings, even when times are hard?

How businesses run into cash flow issues

Generation CFO’s Christopher Argent reckons there are three main reasons for cash flow issues:

• Mismanaging working capital
• Overtrading
• A difficult economic landscape

When sales aren’t enough

“Profit is a very good measure of performance,” says Argent, “but if you don’t keep an eye on your balance sheet and cash flow, you can still run out of money.”

The problem is that making the sale is only one part of the equation. Equally important, the buyer has to pay. And timely invoice payments aren’t a given. A 2017 study found 66% of invoices were paid late, with the average British business waiting 18 days over the due date.

Argent elaborates:

“When you have to buy raw materials, run payroll, pay suppliers, and deal with other running costs, it doesn’t matter how many sales you’re making.

“It’s dangerous to just get on with it and assume the cash will come in, because if it doesn’t, as quickly as you need it you’ll still have trouble meeting your bills. You need to make sure there’s always enough in your account to cover your outgoings.”

Too successful for your own good?

If high sales don’t necessarily mean you’ll meet your obligations on time, growing too fast too soon can also be counterproductive. And it’s not just capital expenditure and other investments that can burn through your working capital. More insidiously, making more sales than you can manage, or overtrading, can also backfire.

Overtrading is especially common amongst small, fast-growing businesses. But more seasoned organisations can fall into the trap too if they don’t keep a close eye.

Argent explains:

“It’s great that your salespeople are selling more product, right? The flipside is that the more you sell, the more raw material, equipment, and staff you need, which drives up your cost of goods sold. Plus you have to pay your salespeople higher commissions.

So sales has a yin and a yang. It’s great for revenue. But if growth isn’t controlled, it can eat up all your cash flow.”

When crisis hits

If managing cash flow is tricky when things are going well, it gets harder in times of crisis. This has been made starkly clear by Covid-19, which is expected to cost businesses $1.1 trillion (approximately £900 billion) in lost revenue.

“In the business-as-usual world, people are very much focused on profit and loss. If we’re selling, there’s nothing to worry about. The cash is going to come in, there’s no question about that,” says Argent. A crisis can quickly turn that assumption on its head, because it causes sudden, immediate changes to incomings and outgoings.

But what’s more problematic, thinks Argent, is the speed of that change. Out of nowhere, you’re faced with a situation where you have to act quickly.

Worse, ‘quick’ isn’t always ‘quick enough’: “Depending on your setup, your tools, and your ecosystem, ‘as quickly as possible’ may not be even remotely close to how quick and agile you need to be.”

Taking control of your cash flow

There are two elements to good cash flow management according to Argent: visibility and agility.

“If I have visibility over my spending, I can quickly identify where my money is going and also where it needs to go. I can say, OK, we’re spending £5,000 on printer paper, but I really need that £5,000 to make payroll.”

But visibility on its own won’t solve cash flow issues. To be effective, it has to work hand in hand with agility.

“Visibility empowers you to make better decisions. But you also need to be able to implement your decisions quickly.

“Let’s say you notice people overspending on the company credit card. How will you stop that? Do you send a blanket email out to everyone saying “Don’t spend anything on that card anymore?” And what if someone doesn’t see it in time? You’re creating a bottleneck.

“To be effective, I need to be able to swoop in and set limits and adjust budgets.”

Boosting visibility and agility

If many businesses lack visibility and agility, it’s often down to their reliance on outdated processes.

In our survey of finance leaders, 70% said it took up to a month to investigate spending across the business. Aside from hampering cash flow management, Argent argues that this has also helped entrench bad habits, because finance doesn’t get access to the full picture in real time:

“If they’re given £10,000 at the start of the year and they only spend £5,000 by the end of it, many businesspeople will phone up suppliers saying: ‘Look, can you send me a PO? Can I spend something with you? Maybe bill me for something I’ll use next year?’ Because they’re worried their budgets will be taken away if they don’t spend them. That’s really poor practice.”

Tools that give you real time visibility into your spending, can help you put a stop to this.

“A product like Soldo allows you to allocate money on an as-needed basis,” says Argent, “because you have the data to say ‘Oh, I can see where you’re spending. That’s all valid.’ Whereas if someone is burning money, you can put a stop to it.”

Indeed, Soldo can tag transactions by user, merchant, expense category, expense centre (a wallet that allows you to ring-fence team or project funds), or even custom accounting or nominal codes.

This means you can find out exactly where your money is going. And you can set limits, so no-one can spend more than you want them to, adjusting them in accordance with your business’ shifting needs.

This, argues Argent, improves cash flow and helps boost revenue by allowing you to divert resources to high impact areas of the business. Which ultimately benefits everyone.

The road ahead: can crisis build the case for finance automation?

With an increasingly uncertain economic outlook, cash flow management will become more important in the coming months. This means reviewing both accounts receivable and payable, tightening spending controls, and re-thinking budgets — all areas where visibility and agility are key.

But will this newfound focus on cash flow management encourage more finance teams to implement finance automation tools?

When we asked finance leaders how they felt, 61.8% said they don’t look at real time data, and 16% said they don’t plan to do so in the next 5 years. But this was between January and March 2020, before Covid-19’s full impact hit.

Argent says:

“I think people take cash flow for granted, but in times like these, you see just how important it is.

And if you have a platform like Soldo, where you can literally go in and see spend in real time, then you’re going to be in a much better position to adapt to your business’ changing needs as they arise.”

“The alternative,” he continues, “is working 24/7 to churn out numbers that might even be wrong.”

Why risk it, when there’s a better choice?

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